What legislation did the Taxes Consolidation Act replace?

(1) The Taxes Consolidation Act 1997, which became law on 30 November 1997, took effect from 6 April 1997. The Consolidated Act replaced the repealed enactments:

(a) the Income Tax Act 1967,

(b) the Income Tax (Amendment) Act 1967,

(c) the Capital Gains Tax Act 1975,

(d) the Corporation Tax Act 1976,

(e) the Capital Gains Tax (Amendment) Act 1978,

(f) the Finance Acts 1967 to 1997 inclusive (the parts dealing with income tax, corporation tax and capital gains tax),

(g) the Finance (Taxation of Profits of Certain Mines) Act 1974,

(h) the Finance (Miscellaneous Provisions) Act 1968,

(i) the Income Tax (Amendment) Act 1986, and

(j) the Waiver of Certain Tax Interest and Penalties Act 1993.

The consolidated legislation takes effect:

(a) in relation to income tax, for 1997-98 and later tax years,

(b) in relation to corporation tax, for accounting periods ending on or after 6 April 1997, and

(c) in relation to capital gains tax, for 1997-98 and later tax years.

The repealed legislation continues to apply for 1996-97 and previous tax years and accounting periods ending before 6 April 1997 (section 1097(1)).

Is there a collective term for the law relating to income tax?

(2) In the Taxes Consolidation Act 1997 and any Finance Acts which subsequently amend it, the Income Tax Actsmeans the legislation relating to income tax in the Taxes Consolidation Act 1997 and in any other Act; the Corporation Tax Acts means the legislation relating to corporation tax in the Taxes Consolidation Act 1997 and in any other Act;the Tax Acts means the Income Tax Acts and the Corporation Tax Acts; the Capital Gains Tax Acts means the legislation relating to capital gains tax in the Taxes Consolidation Act 1997 and in any other Act.

Are external references to the Act as amended?

(3) Where an Act is mentioned in the Taxes Consolidation Act 1997, the reference is to that Act as amended by any other Acts.

What definitions are used for both income tax and corporation tax?

(1) This subsection defines terms that are used throughout the Taxes Consolidation Act 1997 for both income tax and corporation tax.

A body of persons includes not only a company, but “any body corporate…fellowship and society of persons”, whether or not incorporated. A partnership (section 1007) is not a “body of persons” within this definition.

Capital allowance means any of the following allowances:

(a) industrial building allowance, industrial building annual allowance, machinery or plant initial allowance, machinery or plant wear and tear allowance (Part 9),

(b) allowances for farm buildings and structures, farm pollution control structures, and milk quotas (Part 23),

(c) mine development allowance, marginal coal mine allowance, mine rehabilitation allowance, and marginal mine allowance (Part 24 Chapter 1),

(d) allowance for capital expenditure on purchase of patent rights (Part 29).

An inspector means:

(a) an inspector of taxes (section 852),

(b) A Revenue officer who carries out duties similar to those of an inspector, including making of assessments and dealing with appeals – this appears to mean a higher executive officer (HEO), or

(c) a Revenue officer who “acts in the execution of” tax legislation.

The appropriate inspector means:

(a) the inspector who last wrote to you from Revenue,

(b) the inspector to whom you would normally send your return,

(c) the inspector in charge of the Revenue district you live or your business is located,

(d) in any other case, the inspector of returns (see (1A)).

A local authority means a county corporation or borough corporation, a county council, or an urban district council.

A company’s ordinary share capital is its entire issued share capital excluding shares with a right to a dividend at a fixed rate.

If income tax or corporation tax is to be chargeable, the person must have a source of income. If tax is chargeable on the income from a source, the source is within the charge to tax. If a person has no source of income, there can be no charge to tax.

A profession includes a vocation.

Income tax is an annual tax, and must be reimposed by the Dáil each year. The income tax year (year of assessment) is a calendar tax year. The 2012 tax year (the year of assessment 2012) runs from 1 January 2012 to 31 December 2012.

A body corporate is a group of persons which has had conferred on it by law an identity separate from the members comprising it, for example:

(a) a company incorporated under the Companies Acts, e.g., Clery & Co. (1941) Ltd,

(b) a company established by special statute, for example, the E.S.B,

(c) a co-operative society registered under the Industrial and Provident Societies Acts,

(d) a company incorporated by Charter, for example, the Bank of Ireland.

A body corporate does not include an unincorporated society or other body, i.e., a group of persons, whether specially recognised by law or not, which has no identity separate from its members. For example:

(a) a friendly society, for example, a thrift society or a loan society registered under the Friendly Societies Acts,

(b) an association formed for some social or charitable object which has not formed itself into an incorporated company,

(c) a sports club which has not formed itself into an incorporated company,

(d) a trade union.

It is open to these unincorporated societies or bodies (other than trade unions) to convert themselves into bodies corporate by incorporation under the Companies Acts (Inspector manual 1.0.2).

Company includes an unincorporated association: Conservative and Unionist Central Office v Burrel, [1982] STC 335. An unincorporated association is a person: Frampton and another (Trustees of the Worthing Rugby Football Club) v IRC, [1985] STC 186.

Although ordinary share capital generally means the shares that bear the risk of success of failure and usually carry the voting rights, the term can include participating preference shares: Burman v Hedges and Butler Ltd [1979] STC 136. See also Tilcon v Holland, [1981] STC 365.

Although profession is not defined (other than to say that it includes a vocation), it means “an occupation requiring purely intellectual skills or of any manual skill, controlled, as in painting, sculpture, or surgery, by the intellectual skill of the operator…”: IRC v Maxse, 12 TC 41. See notes to section 18 for further relevant cases.

Vocation means a “calling”. It is “a word of wide significance meaning the way in which a man passes his life”:Partridge v Mallandaine, (1886) 2 TC 179. See notes to section 18 for further relevant cases.

Although a trade includes “every … adventure or concern in the nature of trade” (section 3), there is no corresponding charge on once-off transactions of a professional nature.

Who is the inspector of returns?

(1A) The inspector of returns is an officer nominated by Revenue to accept deliver of certain income tax, corporation tax and capital gains tax returns and other documents.

The name of the person nominated as inspector of returns must be published in Iris Oifigiúil.

Does the word “tax” have a specific meaning?

(2) Where the word tax is used in relation to income tax or corporation tax, and neither tax is specified, it means either tax.

Do income tax provisions automatically apply for corporation tax?

(3) Although many income tax provisions are applied for the purposes of corporation tax, with “corporation tax” to be read for “income tax”, the fact that a section refers only to income tax does not prevent the section from also applying for corporation tax.

What does “tax credit” mean?

(3A) The phrase tax credit, in relation to a distribution, takes its meaning according to the law applicable at the time the distribution was made.

Can husbands and wives be of either sex?

(3A) Following the establishment of same sex marriage references in the Tax Acts to a married man, a married woman, a man,  a woman, a husband or a wife can refer to either sex as the context requires.

What definitions apply for income tax?

(1) This subsection defines terms that are used throughout the Taxes Consolidation Act 1997 for income tax.

The standard rate (currently 20%) and higher rate (currently 40%) of income tax are referred to throughout the income tax code.

Although “income” is not defined, your total income means your income from all “sources”, calculated in accordance with income tax rules contained in this Act, as reduced by any deductions which this Act requires to be set against specific income or to be allowed in computing total income (for example, a premium under an approved retirement annuity contract, section 787, or a trading loss when claimed under section 381).

Your chargeable tax for a tax year is the tax chargeable on your total income (which, if you are jointly assessed to tax, includes your spouse’s income) for that year.

The income of a child, or a person of unsound mind (an incapacitated person) is taxed through that person’s guardian or trustee (see section 878).

A relative includes any person of whom the claimant has custody, who, while under the age of 16, is maintained at the claimant’s expense.

Because trade includes “every … adventure or concern in the nature of trade”, the profits or gains arising from “once off” transactions can be taxed as income (see section 18).

Total income

Dividends are taxed in the year in which they are receivable: IRC v Hawley, (1927) 13 TC 327; Dreyfus v IRC, (1963) 41 TC 441; Potel v IRC, (1970) 46 TC 658. The period of accrual is not relevant: Lambe v IRC, (1933) 18 TC 212;Dewar v IRC, (1935) 19 TC 561; IRC v Lebus’s Executors, (1946) 27 TC 136; Champneys’ Executors v IRC, (1934) 19 TC 375.

Balancing charges are treated as part of total income: IRC v Lloyds Bank Ltd and another (Scott’s Executors), (1963) 41 TC 294.

Bonus shares are not regarded as income: IRC v Blott, (1921) 8 TC 101. Distributions credited to a loan account are:IRC v Doncaster, (1924) 8 TC 623.

The fact that income is applied for a specific purpose does not reduce the charge to tax: IRC v Paterson, (1924) 9 TC 163; Perkins’ Executor v IRC, (1928) 13 TC 851; IRC v Parsons, (1928) 13 TC 700; Sinclair v IRC, (1942) 24 TC 432;IRC v Hood Barrs (No 2), (1963) 41 TC 339. See also Lord Wolverton v IRC, (1931) 16 TC 467.

A bankrupt’s income is regarded as that of the trustee not the bankrupt: IRC v Fleming, (1928) 14 TC 78.

Payments made under tax-effective covenants (section 792) are deductible in computing total income (Revenue precedent IT95-2525, 11 May 1995).

Whether trading exists

A person carries on a trade if he/she regularly buys something and sells it at a profit. In other words, if he/she “habitually does and contracts to do a thing capable of producing a profit”: Erichsen v Last, (1881) 1TC 351, 4 TC 422.

A tax avoidance scheme is therefore not a trade: Ransom v Higgs, [1974] STC 539. See also Kilmorie (Aldridge) Ltd vDickinson, (1974) 50 TC 1.

The carrying on of a trade may be contrasted with the sale of a capital asset, i.e., the realisation of an investment which is generally not taxable. Although the realisation of an investment is usually a once-off transaction, such transactions have been held by the courts on many occasions to constitute an adventure in the nature of trade.

The badges of trade

In 1954, a UK Royal Commission reported that trading had six definitive characteristics or “badges of trade”. The UK Revenue have expanded these to nine features (underlined below) used to determine whether a transaction is a trading transaction:

(a) The subject matter of the realisation, i.e., the nature of the asset: Commodities and manufactured products are not normally the subject of investment. Assets such as antiques, gold coins, fine wines and privately held shares are normally held as investments.

The sale by a moneylender of a large quantity of toilet paper bought while he was in Berlin on a separate matter was held to be an adventure in the nature of trade in Rutledge v IRC, (1929) 14 TC 490.

The quick sale, at a profit, of silver bullion bought as a hedge against inflation was held to be an adventure in the nature of trade in Wisdom v Chamberlain, (1968) 45 TC 92.

In Personal Representatives of PJ McCall (deceased) v CIR, 1 ITR 28, profits accruing on the sale of whiskey which had increased in value while in bond were regarded as trading profits.

Trading interest in same field: If the person making the sale has a trading interest in the same field, that fact is evidence of trading: Gloucester Railway Carriage and Wagon Co Ltd v IRC, (1925) 12 TC 720. In that case, receipts from the sale of old railway carriages, although fixed assets, were held to be trading receipts.

See also Agricultural Credit Corporation Ltd v Vale, 1 ITR 474 where a lending company was held taxable on profits from the realisation of investments, and Browne v Bank of Ireland Finance Ltd, 3 ITR 644. In that case, the profit realised on the disposal of government stocks held to satisfy Central Bank liquidity requirements was held to be a trading receipt. But the person making the sale may be involved in a completely different field: IRC v Fraser, (1942) 24 TC 498. That case involved the sale of whiskey by a woodcutter.

In McLellan Rawson & Co Ltd v Newall, (1955) 36 TC 117, the purchase and resale of woodland by a timber merchant was held not to be a trading profit.

Further cases in relation to the purchase and sale of assets:

Held to be trading: Smith Barry v Cordy, (1946) 28 TC 250; Crole v Lloyd, (1950) 31 TC 338; Rhodesia Metals Ltd (in liquidation) v Commissioners of Taxes, (1940) 19 ATC 472; Benyon (T) and Co Ltd v Ogg, (1918) 7 TC 125;Murphy v Australian and Investment Co Ltd, (1948) 30 TC 244; Cooper v C and J Clark Ltd, [1982] STC 335.

Held not to be trading: Cohen’s Executors v IRC, (1924) 12 TC 602; Commissioner of Taxes v British Australian Wool Realisation Assn Ltd, (1930) 9 ATC 449.

(b) The length of the period of ownership, i.e., the interval between purchase and sale. Property meant to be dealt in is normally realised within a short time after its acquisition: Rutledge v IRC, (1929) 14 TC 490. Property held as an investment is usually held for several years or more.

Nevertheless, the purchase of property which is on the verge of being sold cannot properly be regarded as an investment: Eames v Stepnell Properties Ltd, (1966) 43 TC 678. In that case, agricultural land bought by an “investment company” was sold within three years to the Council for development.

(c) The frequency or number of transactions by the same person: A number of similar transactions will lead to a presumption that trading is being carried on. In Pickford v Quirke, (1927) 13 TC 251, the taxpayer was a member of four different syndicates which bought and sold assets of spinning companies. The syndicates had no common members, apart from the taxpayer. The court held that the taxpayer was trading and the other syndicate members were not.

Dividend–stripping operations are not regarded as trading: Lupton v FA and AB Ltd, (1971), 47 TC 580.

(d) Supplementary work on or in connection with the property realised, i.e., modification pending sale. Work on the property or promotion of the property is evidence of dealing: IRC v Livingston, (1926) 11 TC 538. In Cape Brandy Syndicate v IRC, (1921) 12 TC 358, the taxpayers bought South African brandy, shipped it to the UK, blended it with French brandy, recasked the new blend and sold it in several lots. The transactions were held to be an adventure in the nature of trade.

Method of acquisition: In Hudson’s Bay Company Ltd v Stevens, (1909) 5 TC 424, the company acquired lands in Canada under Royal Charter. The acquired lands were later surrendered to the Crown in exchange for other lands. Parts of the replacement lands were sold from time to time. It was held that the sale of the replacement lands was not trading as there was no evidence of intention to deal.

Property acquired involuntarily, for example under a will, may be sold without being characterised as trading. In IRC v Donaldson’s Trustees, (1963) 41 TC 161, the sale by trustees of the deceased’s cattle was held not to be trading. See also Armitage v Moore, (1900) 4 TC 199; Baker v Cook, (1937) 21 TC 337; Weisberg’s Executrices v IRC, (1933) 17 TC 696; Wood v Black’s Executor, (1952) 33 TC 172. This may be contrasted with the decision inPattullo’s Trustees v IRC, (1955) 36 TC 87. In that case the trustees were held liable on profits arising, since the deceased’s death, from crop farming and cattle fattening.

Method of securing sale: In Martin v Lowry, (1926) 11 TC 297, the sale of surplus airforce linen by an agricultural machinery contractor using an elaborate selling organisation was held to be an adventure in the nature of trade.

(e) The circumstances responsible for the realisation: If the realisation was caused by a sudden emergency need for cash, this may negate the idea of planned dealing.

(f) Motive: i.e., profit-seeking motive. It may be possible to infer the purpose of the transaction from the surrounding circumstances. If the motive (intention) in acquiring the property was to hold it as an investment, it indicates the taxpayer was not trading. If the motive was to resell the property, it indicates the taxpayer was trading: IRC v Reinhold, (1953) 34 TC 389.

A taxpayer who over a period of time sold 30 driving schools he started was held to be trading in Leach v Pogson, (1962) 40 TC 585, on the basis that when he sold the first school it was his intention to start another (and sell that).

Commission is therefore taxed as a trading receipt: Orchard Wine and Spirit Co v Loynes, (1952) 33 TC 97. More recently, see Clark v British Telecom Pension Scheme Trustees and another, [1998] STC 1075 in which sub-underwriting commission paid to trustees of an exempt approved pension scheme was held to be trading income (as it was derived from operations of a commercial character provided for reward).

A decision to transact business through a company is evidence of trading: Lewis Emmanuel and Son Ltd v White, (1965) 42 TC 369. In that case, the company was held liable on profits from share dealing transactions. However, loss-making speculative trading by an individual on the stock exchange, i.e., in shares, was held not to be trading inSalt v Chamberlain, [1979] STC 750.

Profits from commercial trading (for example, a restaurant) are chargeable to tax, even if the trade is not carried on with a view to a profit: Grove v YMCA, (1903) 4 TC 613. Thus, in Exported Live Stock (Insurance) Board v Carroll, 2 ITR 211, a statutory body set up to implement a compulsory insurance scheme was treated as carrying on a trade.

Non-commercial or charitable activities, which have no hope of making a profit, are not regarded as trading (see author’s notes to section 207): Religious Tract and Book Society of Scotland v Forbes, (1896) 3 TC 415. Losses arising on such activities are therefore not allowable. See also Veterinary Council v Corr, 2 ITR 204. In that case, surplus income from registration and annual fees accruing to a body performing statutory functions was not regarded as trading income. Similarly, in The Racing Board v O’Culacháin, 4 ITR 73, statutory levies made by the Racing Board were not regarded as trading receipts.

Method of financing: The fact that money has been borrowed to finance a venture is indicative of trading: Harvey v Caulcott, (1952) 33 TC 159.

The manner in which profit that has already been earned is spent is not material in deciding whether a transaction was a trading transaction: Mersey Docks and Harbour Board v Lucas, (1883) 2 TC 25. See also Paddington Burial Board v IRC, (1884) 2 TC 46.

The following miscellaneous receipts have been held to be income from trading:

(a) Card winnings: Burdge v Pyne, (1968) 45 TC 320.

(b) Company promotion: OK Trust Ltd v Rees, (1940) 23 TC 217.

(c) Construction rebates for railway sidings: Westcombe v Hadnock Quarries Ltd, (1931) 16 TC 137. These were held to be capital in Legge v Flettons Ltd, (1939) 22 TC 455.

(d) Contango received by a sharedealer: Multipar Syndicate Ltd v Devitt, (1945) 26 TC 359.

(e) Harbour dues: Sowrey v King’s Lynn Harbour Mooring Commissioners (1887) 2 TC 20.

(f) Newsfilm service receipts: British Commonwealth International Newsfilm Agency Ltd v Mahany, (1962) 40 TC 550.

(g) Payments in kind: Temperley v Smith, (1956) 37 TC 18.

(h) Publications activity regarded as a separate trade: British Broadcasting Corporation v Jones, (1964) 41 TC 471.

(i) Rebates: Pope v Beaumont, (1941) 24 TC 78.

(j) Receipt for variation of contract: Shadbolt v Salmon Estate (Kingsbury) Ltd, (1943) 25 TC 52.

(k) Receipts connected with a sale of shares: Lamport and Holt Line Ltd v Langwell, (1958) 38 TC 193.

(l) Receipts for assignment of contract: Thomson (George) and Co Ltd v IRC, (1927) 12 TC 1091.

(m) Receipts from the production of grass meal from land used by the military: O’Connell v Shackleton and Sons,[1982] ILRM 451.

(n) Receipts from the sale of a betting system: Graham v Arnott, (1941) 24 TC 157.

(o) Receipts of a railway company with substantial investment and rental income: IRC v Dublin and KingstonRailway Co, 1 ITC 131; [1930] IR 317.

(p) Receipts accruing to a limited partnership set up to finance film production: Ensign Tankers (Leasing)Ltd v Stokes, [1992] STC 226.

(q) Record royalties: Electric and Musical Industries Ltd v IRC, (1950) 29 ATC 157.

(r) Sale of rounds: Bonner v Frood, (1934) 18 TC 488.

(s) Unclaimed deposits: Jays the Jewellers Ltd v IRC, (1947) 29 TC 274; Elson v Prices Tailors Ltd, (1962) 40 TC 671 but not in Morley v Tattersall, (1938) 22 TC 51.

The following miscellaneous receipts have been held not to be income from trading:

(a) Profits arising to a commodity broker trading from home: Wannell v Rothwell, [1996] STC 450.

(b) Charges levied by a company administering a holiday pay scheme: Building and Civil Engineering Holidays Scheme Management Ltd v Clark, (1960) 39 TC 12.

(c) Profits accruing to a company financing a joint venture: Stone and Temple v Waters, [1995] STC 1.

(d) A gain accruing to executors on completing a contract initiated by the deceased: Cohan’s Executors v IRC, (1924) 12 TC 602.

See also Jenkinson v Freedland, (1961) 39 TC 636; Shingler v Williams (P) and Sons, (1933) 17 TC 574.

Are liquidators’ profits trading receipts?

In City of Dublin Steampacket Co v Revenue Commissioners, 1 ITR 318, a company in liquidation was held to be carrying on business even after the liquidator had been appointed. Profits arising to the liquidator were held not to be trading receipts in IRC v ‘Old Bushmills’ Distillery Co Ltd, (1927) 12 TC 1148 and Wilson Box (Foreign Rights) Ltd v Brice, (1936) 20 TC 736.

Are transactions in land “trading”?

Land may be traded (i.e., bought and sold at a profit) and/or held as an investment. Once-off transactions in land may be categorised under either heading depending on the particular facts of the case. In Taylor v Good, [1974] STC 148, 49 TC 294, the taxpayer bought land, obtained planning permission to build houses on it, and sold it at a substantial profit. The transaction was held not to be a trading transaction even though acquiring the planning permission clearly constituted supplementary work on the property realised.

The question to be answered in land transactions is: “Was the taxpayer investing the money, or was he doing a deal?”: Browne-Wilkinson VC in Marson v Morton, [1986] STC 463. In that case, the disposal, within three months of its acquisition, of land acquired as a long-term investment was held not to be a trading transaction. This may be contrasted with the decision in Kirby v Hughes, [1992] STC 76. In that case, a builder who was living with his parents bought, improved and sold two properties. The taxpayer was held to be trading. For an Irish case in this regard, seeSpa Estates Ltd v O hArgáin, Kenny J, Unreported, 20 June 1975.

Commercial transactions in land are now generally taxed as trading transactions (see notes to Part 22). Non-trading gains on the disposal of land are taxed under the capital gains tax law (Part 19).

Are profits of mutual societies trading profits?

If the profits (surplus) of a mutual society or club go back to the society’s members, the society cannot be regarded as trading, because a person cannot trade with himself: Styles v New York Life Insurance Company Ltd, (1889) 2 TC 460.

However, profits arising from providing goods or services to non-members are regarded as trading profits: Carlisle and Silloth Golf Club v Smith, (1913) 6 TC 198. See also Carnoustie Golf Course Committee v IRC, (1929) 14 TC 498; IRC v Stonehaven Recreation Ground Trustees, (1929) 15 TC 419; IRC v Cornish Mutual Assurance Co Ltd, (1926) 12 TC 841; IRC v Eccentric Club Ltd, (1923) 12 TC 657; Jones v The South-West Lancashire Coal Owners’ Association Ltd, (1927) 11 TC 790; Faulconbridge v National Employers’ Mutual General Insurance Association Ltd, (1952) 33 TC 103 and IRC v Eccentric Club Ltd, (1923) 12 TC 657.

For Irish cases, see Kennedy v Rattoo Co-operative Dairy Society Ltd, 1 ITR 315, and Revenue Commissioners v Y Ltd, 2 ITR 195.

A society is not regarded as mutual unless the surplus is distributed among the members in proportion to the amounts contributed by each member: Doctor’s Cave Bathing Beach (Fletcher) v Jamaica Income Tax Commissioner, [1971] 3 All ER 1185.

See also Municipal Mutual Insurance Ltd v Hills, (1932) 16 TC 430, 198; Liverpool Corn Trade Association v Monks, (1926) 10 TC 442; English and Scottish CWS Ltd v Assam Agricultural Income Tax Commissioner, (1948) 27 ATC 332 and Staffordshire Egg Producers Ltd v Spencer, (1963) 41 TC 131.

Example

(a) income from an employment or past employment,

(b) income from the carrying on of a trade or profession.

Unearned income would, therefore, include dividends, interest or rental income from property, i.e., income that has not been “earned”.

Earned income means income earned by an individual’s personal exertion and the term does not therefore include income received by a Lloyd’s name who is not engaged full-time in the Lloyd’s underwriting market: Koenigsberger v Mellor, [1993] STC 408.

Earned income includes income of an active partner after expenses: Frame v Farrand, (1928) 13 TC 861; and charges:Adams v Musker, (1930) 15 TC 413; Dealler v Bruce, (1934) 19 TC 1; Lewin v Aller, (1954) 35 TC 483. It does not include income of a passive partner i.e., a partner who does not carry on the trade or profession (for example, a limited partner or sleeping partner). Although a limited partner is prohibited by law from being actively engaged in the management of the partnership, the income of a limited partner could be earned income if he/she were engaged in the business in a non-managerial capacity.

Income arising from a purchased life annuity (see section 788) may be treated as earned income if the annuity was bought in lieu of a pension that would have been treated as earned income under the rule in Hancock v General Reversionary and Investment Co Ltd, (1918) 7 TC 358.

Unearned income has traditionally been treated in tax law as distinct from income actively derived from an employment, trade or profession.

The following types of income have been held to be earned income:

(a) A short term gain on sale of goodwill: Peay v Newton, (1970) 46 TC 653.

(b) Dividends on shares held by employees: White v Franklin, (1965) 42 TC 283 and Racknell v IRC, (1952) 33 TC 201.

(c) Trustees’ annuities: Dale v IRC, (1953) 34 TC 468 but not trust income in general: Fry v Shiel’s Trustees, (1914) 6 TC 583.

The following types of income have been held to be unearned income:

(a) Income from securities received by a banking partnership: Bucks v Bowers, (1969) 46 TC 267.

(b) Interest received by a solicitor on clients’ deposit accounts: Brown v IRC, (1964) 42 TC 42 and Northend v White and others, [1975] STC 317.

(c) Dividends received by an accountant allegedly for services: Evans v Pearce, (1973) 49 TC 120.

(d) Pension to a retired partner under the partnership deed: Pegler v Abell, (1972) 48 TC 564 and Lawrence v Hayman, [1976] STC 227.

(e) Share of profits paid to a retired partner where the consultancy services were minimal: Hale v Shea, (1964) 42 TC 260.

What definitions apply for corporation tax?

(1) This section defines terms that are used throughout the Taxes Consolidation Act 1997 for corporation tax.

Corporation tax is charged on the profits (income and chargeable gains) of every company (any body corporate including a trustee savings bank) at the rate applicable for each financial year (the calendar year, from 1 January to 31 December).A company’s profits, for tax purposes, are its profits as computed under generally accepted accounting principles (GAAP) which:

(a) in the case of a company the accounts of which are prepared under international accounting standards (IAS) mean International Financial Reporting Standards (IFRS),

(b) in all other case, means Irish GAAP.

Corporation tax is not charged on the profits of agricultural committees, health boards, local authorities or vocational educational committees. The profits of European Economic Interest Groupings are taxed on the individual members of such a grouping.

A distribution also includes a scrip dividend i.e., additional shares issued by an Irish resident quoted company which are taxed in the hands of the recipient on the basis of the shares’ cash value (section 816(2)(b)).

A non-resident company trading in the State is taxed through the branch or agency carrying on the trade in the State.

For corporation tax purposes, trade includes a vocation, office or employment.

Do income tax definitions apply for corporation tax?

(2) The income tax definitions which extend to corporation tax are not confined to those listed in section 3(1). Other definitions expressed elsewhere in the Taxes Consolidation Act 1997 for income tax (usually for specific purposes) also extend to corporation tax (for the same specific purpose).

Are payments received in trust treated as income of the recipient?

(3) Distributions received by another person on behalf of or in trust for a company are treated as received by that company.

Distributions received by a company on behalf of or in trust for another person are not treated as received by that company.

What does “profits brought into charge to corporation tax” mean?

(4) Profits brought into charge to corporation tax means profits before charges on income, management expenses, and any other items which are deductible from total profits (for example, certain trading losses or group relief).

Total income brought into charge to corporation tax means total income from all sources included in any profits brought into charge to corporation tax.

The amount of profits on which corporation tax falls finally to be borne means the amount on which tax is charged, after allowing all deductions.

In Cronin v Youghal Carpets (Yarns) Ltd, (1985) 3 ITR 229 it was held that profits or gains brought into charge means profits after allowing group (loss) relief.

What definitions apply for capital gains tax?

(1) This section defines terms that are used throughout the Taxes Consolidation Act 1997 for capital gains tax.

Land includes any interest in land, for example, a leasehold interest.

A lease of land includes a sublease, tenancy or licence to use land. A lease of any other kind of property includes any agreement whereby payments are made for the use of the property.

A legatee includes a person who takes property under a will or intestacy, or by survivorship.

A unit trust is a trust where the unit holders participate as beneficiaries in profits arising on the buying and selling of shares or other property.

The capital gains tax year (year of assessment) is the same as the income tax year. The 2012 tax year (the year of assessment 2012), therefore, runs from 1 January 2012 to 31 December 2012.

Can husbands and wives be of either sex?

(1A) Following the establishment of same sex marriage references in the Capital Gains Tax Acts to a married man, a married woman, a man,  a woman, a husband or a wife can refer to either sex as the context requires.

How is a married woman treated for capital gains tax?

(2) For capital gains tax purposes, a woman is treated as living with her husband, and civil partners are treated as living together, if the couple would be so treated for income tax purposes.

Is deemed disposal expenditure deductible?

(3) Several capital gains rules provide that assets are to be treated as sold and immediately reacquired by the seller. This does not mean that any expenditure related to the notional sale and reacquisition is deductible.

Does a stepchild or an adopted child qualify as a child?

A child includes a stepchild and a child who has been formally adopted under Irish or equivalent foreign adoption law. An adopted child is regarded as the child of its adoptive parents, not the child of its biological parents.

The Revenue view is that an adopted child remains the child of the natural parent for the purposes of covenant relief (see section 792).

What is the age of majority?

(1) The Age of Majority Act 1985 reduced the age of majority from 21 years of age to 18 years of age.

(2) You do not lose your entitlement to the single person cild carer credit (section 462B) or the incapacitated child tax credit (section 465) if your child becomes incapacitated between the ages of 18 and 21 years.

Does a child born outside marriage qualify as a child for tax purposes?

(2) For the purposes of income tax, corporation tax, capital gains tax, capital acquisitions tax and stamp duty, children born out of wedlock have the same legal status as children born in wedlock.

See Inspector Manual 1.0.1, 15.1.29.

Section 9 Subsidiaries

What is a subsidiary?

(1)-(2) A 51% subsidiary is a company whose ordinary share capital is owned, directly or indirectly, as to 50% or more, by another company.

A 75% subsidiary is a company whose ordinary share capital is owned, directly or indirectly, as to 75% or more, by another company.

A 90% subsidiary is a company whose ordinary share capital is owned, directly or indirectly, as to 90% or more, by another company.

A wholly-owned subsidiary is a company whose entire ordinary share capital is owned, directly or indirectly, by another company.

A company in liquidation cannot be a parent company because such a company is no longer the beneficial owner of its assets: Ayerst v C and K (Construction) Ltd, [1975] STC 345; IRC v Olive Mill Spinners Ltd, (1963) 41 TC 77.

The granting by a 75% parent company of an option to another shareholder to buy 5% of its 75% holding did not prevent the grantor from qualifying as a 75% parent: Sainsbury plc v O’Connor, [1991] STC 318.

When are shares owned?

(3) Ownership means beneficial ownership, i.e. full entitlement to the shares and the income arising from them.

Does indirect ownership count?

(4) The rules for determining how much one company owns of another company are set out in (5) to (10) below.

What if ownership is held through a series of companies?

(5)-(6) If one company owns shares of a second company, which owns shares of a third company, the first company is deemed to own part of the third company’s shares.

Any three or more companies of which one owns ordinary share capital in the next, as described in the above example, is called a series.

The series is composed of the first owner, the last owned company, each company in the chain (an intermediary).

Any two companies are referred to as a chain of intermediaries.

A company in a series which owns capital of another company in the series is called an owner. If a company directly owns ordinary shares in another company in a series the two companies are directly related.

Example

A Ltd owns shares in B Ltd, B Ltd owns shares in C Ltd, and C Ltd owns shares in D Ltd.

A Ltd indirectly owns shares in C Ltd and D Ltd etc.

What if 100% ownership is held through a series of companies?

(7) If every owner in a series owns 100% of the ordinary share capital of the next company then the first owner owns 100% of the ordinary share capital of the last owned company.

What if fractional ownership is held through a series of companies?

(8) If each owner in a series owns a fraction of the ordinary share capital of the next company, then the first owner owns a fraction of the ordinary share capital of the last owned company.

How is ownership worked out where companies are related?

(9) Where each owner in a series owns a percentage of the ordinary share capital of the company to which it is directly related, the first owner owns the percentage of the ordinary share capital of the last owner which is arrived at by multiplying the intermediate percentages.

Example

If A Ltd owns 80% of B Ltd, which owns 100% of C Ltd, which in turn owns 75% of D Ltd, then A Ltd indirectly owns 60% of D Ltd (80% x 100% x 75%).

D Ltd is, therefore, a 51% subsidiary of A Ltd, while B Ltd and C Ltd are 75% subsidiaries of A Ltd.

How is ownership worked out where there is a series of indirect ownerships?

(10) Where the first owner owns shares in the last owned company directly or indirectly through one or more series, to calculate how much it owns of the last owned company, total the various percentages owned through each separate series.

Example

Building on the preceding example, if A Ltd also owns 40% of E Ltd, which in turn owns 50% of D Ltd, then A Ltd indirectly owns a further 20% of D Ltd (40% x 50%).

In this case, A Ltd ends up indirectly owning 80% of D Ltd (60% + 20%) making D Ltd a 75% subsidiary of A Ltd.

Who is my relative?

(1) Your relative means your brother, sister, ancestor or lineal descendant. For capital gains tax purposes, a relative also includes an uncle, aunt, niece or nephew.

You control a company if you can control the company’s affairs or obtain more than half the company’s shares, voting power, income, or assets (on a winding up) (section 432).

A settlement includes any trust, disposition, covenant, agreement or arrangement, and any transfer of money or other property.

A settlor is a person who makes a settlement (trust) and can include any person who directly or indirectly funds the settlement.

For meaning of settlement and arrangement, see notes to section 794.

Settled property means property held in trust except where another person is absolutely entitled against the trustee. It includes land held on certain trusts under a will, Crowe v Appleby, [1976] STC 301, but not land held jointly (concurrently or in common): Kidson v Macdonald and another, [1974] STC 54; Harthan v Mason, [1980] STC 94.

When do the “connected person” rules apply?

(2) The connected person rules in (3) to (8) apply for income tax, corporation tax and capital gains tax unless the context indicates otherwise.

Who am I connected with?

(3) You are connected with:

(a) your spouse*,

(b) your relatives,

(c) your relative’s spouse,

(d) your spouse’s relative, and

(e) the spouse of your spouse’s relative.

* For “spouse” read “spouse/civil partner”.

A husband and wife in divorce proceedings are regarded as connected until the divorce is final: Aspden v Hildesley, [1982] STC 206.

Who is a trustee connected with?

(4) A trustee is connected with:

(a) the settlor,

(b) any person connected with the settlor,

(c) a close company (or a company which, if it were resident in the Republic of Ireland, would be close) whose participators (at any time during a tax year or accounting period when it is close) include the trustees of, or a beneficiary under the settlement.

Who is a partner connected with?

(5) A partner is connected with:

(a) every other partner in the partnership,

(b) each partner’s spouse, and

(c) a partner’s relatives.

Who is a company connected with?

(6) A company is connected with another company if a third company or group of persons, either directly or through connected persons, controls the first two companies.

See Floor v Davis, [1979] STC 379, IRC v Harton Coal Co Ltd (In Liquidation), (1960) 39 TC 174.

Is a company connected with its shareholders?

(7) A company is connected with persons who, directly or through connected persons, control the company.

See Steele v EVC International NV, [1996] STC 785.

Are joint controlling shareholders connected?

(8) Persons who acting in concert can control a company are connected with each other, and with any person who acts on their direction to control the company.

What is “control” of company?

You control a company if either through holding shares or through special voting powers, you can ensure that the company’s affairs are conducted in accordance with your wishes.

You control a partnership if you have a right to more than half of the partnership income or assets.

This definition of control is used, for example, for seed capital relief (section 493(7)).

The voting power required to secure control is usually contained in the company’s articles of association or other documents: IRC v Lithgows Ltd, (1960) 39 TC 270. For cases on indirect control see: IRC v Clark (FA) and Sons Ltd, (1941) 29 TC 49; British-American Tobacco Co Ltd v IRC, (1942) 29 TC 49; S Berendsen Ltd v IRC, (1957) 37 TC 517

Casting votes may be treated as part of the controller’s voting power: IRC v B W Noble Ltd, (1926) 12 TC 911 and IRC v Monnick Ltd, (1949) 29 TC 37. Votes exercised as trustee may also be treated as part of the controller’s voting power: Bibby (J) and Sons Ltd v IRC, (1945) 29 TC 167; John Shields and Co (Perth) Ltd v IRC, (1950) 29 TC 475 andIRC v Silverts Ltd, (1951) 29 TC 491.

Votes exercised as attorney may not be treated as part of the controller’s voting power: IRC v James Hodgkinson (Salford) Ltd, (1949) 29 TC 395.

Votes which cannot be exercised are ignored: Appleby (Joseph) Ltd v IRC, (1950) 29 TC 483.

Shares with special rights: see IRC v Harton Coal Co Ltd (In Liquidation), (1960) 39 TC 174.

What are the income tax schedules?

Income tax is charged under four Schedules:

Schedule C,

Schedule D,

Schedule E, and

Schedule F.

Income is not defined. It is described by Schedules which date from the time income tax was first introduced as a temporary tax in 1799 by William Pitt, the chancellor of the exchequer. The rate was 10% and the tax was payable by anyone earning more than £60 a year.

The four original Schedules taxed income in descending order of importance: income from land, income from personal property and trades, income arising outside Great Britain, and income not falling within the other categories. Each taxpayer was required to complete a single return of income comprising income under 19 different headings (Cases) with different deductions for each Case.

The temporary income tax was repealed by Henry Addington, Pitt’s successor, but was reintroduced in 1803 to finance the war with France. Wealthy landowners had objected to the notion of a single return disclosing the taxpayer’s entire wealth to a local assessor of lower social status. As a result, when the tax was reintroduced, a return for each of the 19 different headings could be sent to a different surveyor, ensuring that no surveyor had a complete picture of the taxpayer’s wealth. Although income tax was again abolished after the war with France ended in 1816, it was permanently reintroduced in 1842 by Sir Robert Peel, the Tory prime minister.

The system of charging income tax under Schedules, i.e., the schedular system, assumes that the taxpayer has asource of income, for example, land, personal property, or a trade. It follows that if a taxpayer has no source of income, he/she cannot be charged to income tax. The source (or capital) is the tree; income is the fruit of the tree.

A source of income does not include a potential source of income such as an interest-free loan: Walker v Centaur Clothes Group Ltd, [1998] STC 814.

Because income tax is an annual tax, for income to be taxed in a tax year the source of the income must exist in that tax year. On this basis receipts arising after a trade has ceased could fall out of assessment and not be taxed as their source has ceased to exist. Such receipts are taxed under section 91. Similarly, income arising before an employment commences, or after the employment ceases could fall out of assessment and not be taxed. Such receipts are taxed under section 112(2).

The Schedules are mutually exclusive. In other words, a source of income may only be taxed under the Schedule to which it is correctly attributable: Salisbury House Estates Ltd v Fry, (1930) 15 TC 266. This means that the more generous Schedule D deductions may not be claimed against Schedule E employment income: Mitchell and Edon v Ross, (1961) 40 TC 11. Letting of property was held to be the carrying on of a business in American Leaf Blending Co Sdn Bhd v Director General of Inland Revenue, [1978] STC 561.

Although the Schedules are mutually exclusive, the Cases are not: Liverpool and London and Globe Insurance Co v Bennett, (1913) 6 TC 327. See also Lowe v J W Ashmore Ltd, (1970) 46 TC 597.

What are offshore exploration activities?

(1) Exploration or exploitation activities are activities relating to exploration or exploitation of the sea bed and its natural resources either within Irish territorial waters or a designated area, i.e., a block on the Continental Shelf in which the Government has granted offshore exploration rights.

Exploration or exploitation rights are rights to assets generated from exploration or exploitation activities.

Prior to this legislation, an oil or gas exploration company which was not resident in the Republic of Ireland (ROI), but was exploring for oil or gas on the Continental Shelf outside Irish territorial waters, would not be chargeable to Irish tax unless it had an ROI branch or agency.

Are offshore exploration profits taxed?

Are offshore exploration profits of a foreign company taxed?

(3) Profits derived from offshore exploration activities carried on by a foreign company are treated as arising from an ROI branch.

Are profits of a licence holder taxed?

(4) The holder of an offshore exploration licence is deemed to be the agent of a person who carries on exploration/exploitation activities on its behalf.

Are offshore rig employees subject to Irish tax?

(5) Employees working on an offshore platforms in designated areas are regarded as working in the Republic of Ireland and caught for PAYE.

See Clark v Oceanic Contractors Inc, [1983] STC 35, which dealt with the UK taxability of workers on North Sea rigs.

How is tax collected from offshore licence holders?

(6) The detailed rules in Schedule 1 regarding information to be provided to the inspector and collection of tax apply to such licence holders.

What is the standard rate of income tax?

(1) Income tax is charged for every tax year at the standard rate (currently 20%).

What is the higher rate of income tax?

(2) The higher rate (currently 41%) applies to the part of an individual’s taxable income which exceeds the standard rate band (see (5) below).

What is the standard rate band for a married couple?

(3) A jointly assessed married couple (section 1017) or civil partnership (1031C) may increase their standard rate band by the lower of:

(a) €24,800, or

(b) the lower of their two incomes (specified income).

What is the “specified income” of a married couple?

(4) In (3), the net income (specified income) of either the husband or the wife means income after deductions attributable to a particular source of income.

What is the standard rate band for a single person?

(5) For 2015, income is taxed as follows:

(a) single person: first €33,800 at 20%, balance at 40%.

(b) single parent: first €37,800 at 20%, balance at 40%.

(c) married couple or civil partnership: first €42,800 at 20%, balance at 40%. But see (3) above.

How do I account for tax I have deducted at source?

(1) A person making an annual payments (section 237) must deduct tax at source and account for such tax to Revenue.

What rate applies to tax deducted at source?

(2) Although your income may be chargeable to tax at the higher rate, the standard rate applies to annual payments.

What is Schedule C tax?

(1) A bank or paying agent (a person responsible for paying dividends and interest payable from the public revenue of any government or foreign public authority) must deduct Schedule C tax from the amount payable in the Republic of Ireland.

In the case of UK Treasury Stock, the Schedule C tax is deducted from the gross amount receivable (not the amount payable in the State).

The UK Courts have held that the Schedule C charge does not apply to other types of interest: Esso Petroleum Co Ltd v Ministry of Defence, (1989) 62 TC 253.

How is Schedule C tax collected?

(2) Schedule C tax is collected by self-assessment. The pay and file procedures and dates are set out in Schedule 2.

Does Schedule C tax apply to cheque clearing?

(3) The words “or otherwise” in section 17(1) were considered wide enough to include clearing of a cheque. The encashment tax rule in (1) does not apply where the banker merely clears a cheque or arranges for the clearing of a cheque. A banker that acts as a collecting agent remains obliged to deduct encashment tax.

See Tax Briefing 35, March 1999.

What is Schedule D?

(1) Schedule D is the heading under which business, rental and interest income is taxed.

What are the Schedule D Cases?

(2) Schedule D has five subdivisions known as Cases:

Case I: Charges the profits of any trade including a quarry or a mine. It also includes profits from canals, docks, rights of markets, tolls, railways, bridges and ferries.

Case II: Charges the profits of any profession.

Case III: Charges the following types of income:

(a) Interest (untaxed), annuities and annual payments.

(b) Discounts.

(c) Profits on government securities which are not charged under Schedule C.

(d) Interest paid on government securities (section 36).

(e) Income from foreign securities that is not taxed under Schedule C.

(f) Income from foreign property (including a trade carried on abroad), including a foreign employment (but not in respect of the part of the income from the employment which is attributed to work carried on in the ROI).

Case V: Charges rental income from any premises, and income from easements (for example, granting of rights of way).

Case IV: Charges any miscellaneous income that does not fall within Cases I, II, III or V (and is not chargeable under Schedules E or F).

Income from an office, employment or pension is not taxed under Schedule D unless the office, employment of pension is a foreign possession, in which case it is taxed under Case III.

Case I

What does “trade” mean?

For the meaning of “trade”, see notes to section 4. A single company can carry on several trades, for example, milling, hardware, furniture, fancy goods, wholesale grocery, public house: McElligott (P) and Sons Ltd v Duigenan, (1984) 3 ITR 178.

As to whether there are one or more trades, see Highland Railway Co v Special Commissioners (1885) 2 TC 151;Scales v Thompson (George) and Co Ltd, (1927) 13 TC 83; Laver and Laver v Wilkinson, (1944) 26 TC 105; IRC v William Ransom and Son Ltd, (1918) 12 TC 21 and North Central Wagon and Finance Ltd v Fifield, (1953) 34 TC 59.

The special seller’s prize payable by the National Lottery to Lotto agents who sell winning Lotto tickets is taxable under Case I (Revenue Precedent GD9407, 25 May 1994).

Payments made by German Rehabilitation Programmes to Irish foster parents to accommodate German youths are taxable under Case I. If the foster parents are employees of the German payer, the payments are chargeable under Schedule E (Revenue Precedent IT 95-2520, 24 April 1996).

Can letting of land or buildings be a trade?

Letting of land or buildings is not a trade and is taxable under Schedule D Case V: Webb v Conelee Properties Ltd, [1982] STC 913. It may be taxable as a hotel-type trade if the landlord exercises constant supervision over the property and provides services in connection with the property: Páircéir v EM, (1971) 2 ITR 596.

Therefore, Revenue do not generally accept that income from Bord Fáilte-registered holiday cottages is chargeable under Case I. The Case under which the income is to be charged is to be determined by the circumstances of each case (Revenue Precedents IT90-3103 3 July 1990 and IT95-3544 6 June 1996).

The Appeal Commissioners have held that income from an “aparthotel”, i.e., a block of apartments together with shops, cleaning apartments, laundry, security, advertising expenditure, long-term letting and short-term lettings, was chargeable under Case I as letting of rooms and not under Case V. In a later case, with similar facts, where less services were provided, the Appeal Commissioners held that the income was chargeable under Case V: 8 AC 2000.

Can receipt of deposit interest be a trade?

The general position in relation to deposit interest is that it is prima facie passive income and is assessable as Case III/Case IV income. In order for an alternative treatment to apply, there is a very high burden of proof on the taxpayer.

Deposit interest which derives from the investment of regulatory capital is assessable Case I: Tax Briefing 44, June 2001

How do I tell capital from revenue receipts?

A receipt cannot be taxed as a trading receipt unless it is a revenue receipt i.e., a receipt in the nature of income, as opposed to capital. Capital receipts cannot be taxed as trading receipts. This area of revenue law has been the subject of hundreds of cases which can be illustrated by the analogy of the tree and its fruit. The source of income (or capital) is the tree; income is the fruit of the tree. A payment received for the fruit of the tree is a trading receipt; a payment received for the tree itself is a capital receipt.

Capital gains are now taxed under Part 19, but it remains in the interest of a taxpayer to accrue a gain as capital rather than income as the current rate of capital gains tax (section 28) is significantly lower than the rate applicable to income (section 15).

Is compensation for the loss of an asset a capital or revenue receipt?

The general rule is that compensation for the permanent loss of a (fixed) asset is taxed as capital. On the other hand, compensation for:

(a) the loss of use of an asset,

(b) the loss of trading stock, or

(c) the loss of profits,

is taxed as a trading receipt. The leading case is Glenboig Union Fireclay Company Ltd v IRC, (1922) TC 427. In that case, a fireclay company was paid by a railway company not to mine near the railway line for fear of damage the mining might cause. It was held that the receipt was a capital receipt, as it had been received for the permanent sterilisation of an asset i.e., the permanent loss of a fixed asset. See also Barr Crombie and Co Ltd v IRC, (1945) 26 TC 406; British-Borneo Petroleum Syndicate Ltd v Cropper, (1968) 45 TC 201; Creed v H and M Levinson Ltd, [1981] STC 486; IRC v West (Francis) and others, (1950) 31 TC 402.

See also IRC v Williams Executors, 26 TC 23, where the recipient was taxed on the receipt of insurance on the life of a key employee.

What about compensation for the loss of use of an asset?

Compensation for the loss of use of an asset is taxed as trading income: Burmah Steamship Co Ltd v IRC, (1930) 16 TC 67; Vaughan v Archie Parnell and Alfred Zeitlin Ltd, (1940) 23 TC 505; Johnson v Try (WS) Ltd, (1946) 27 TC 167;Waterloo Main Colliery Co Ltd v IRC (No 1), (1947) 29 TC 235; London and Thames Haven Oil Wharves Ltd v Attwooll, (1966) 43 TC 491; Wiseburgh v Domville, (1956) 36 TC 527.

Is compensation for the loss of trading stock taxable?

Compensation for the loss of trading stock is taxed as trading income: Green v Gliksten (J) and Son Ltd, (1929) 14 TC 364; R v British Columbia Fir and Cedar Lumber Co Ltd, (1932) 15 ATC 624; Gray and Co Ltd v Murphy, (1940) 23 TC 255; Mallandain Investments Ltd v Shadbolt, (1940) 23 TC 367; Keir and Cawder Ltd v IRC, (1958) 38 TC 23. But it is not taxed if related to capital assets: Crabb v Blue Star Line Ltd, (1961) 39 TC 482.

Is compensation for the loss of profits taxable?

Compensation received for the cancellation of a business contract which defined the territories the company could operate in was held to be a capital receipt in Van Den Berghs Ltd v Clark, (1935) 19 TC 390. This was because the contract in question was so fundamental as to constitute the company’s entire profit-making apparatus. See alsoSabine v Lookers Ltd, (1958) 38 TC 120; British-Borneo Petroleum Syndicate Ltd v Cropper, (1968) 45 TC 201; Barr, Crombie and Co Ltd v IRC, (1945) 26 TC 406. The relevant Irish cases are O’Dwyer v Irish Exporters and Importers Ltd (in liquidation), 1 ITR 629 and Guinness v CIR, 1 ITR 1.

A payment received from the Department of Agriculture for grubbing up an orchard is capital in nature, and is chargeable under capital gains tax rules (Revenue Precedent IT95-3511, 15 August 1995).

Compensation for the suspension of a milk quota is also regarded as capital (Revenue Precedent IT 89-2037, 23 October 1989).

Compensation received for cancellation of a less fundamental agency agreement is regarded as trading income: Kelsall Parsons and Co v IRC, (1938) 21 TC 608; IRC v Fleming and Co (Machinery) Ltd, (1951) 33 TC 57; Elson v James G Johnston, Ltd, (1965) 42 TC 545; IRC v David MacDonald and Co, (1955) 36 TC 388; Fleming v Bellow Machine Co Ltd, (1965) 42 TC 308.

Compensation received by an actor for agreeing not to carry on his profession for 18 months was held to be a capital sum in Higgs v Olivier, (1952) 33 TC 136. This may be contrasted with the decisions in IRC v Biggar, [1982] STC 677 and White v G and M Davis, (1979) 52 TC 597.

In general, compensation for loss of profits is taxed as trading income: Thompson v Magnesium Elektron Ltd, (1943) 26 TC 1. In Alliance and Dublin Gas Consumers Co Ltd v McWilliams, 1 ITR 426, the company was held chargeable on compensation received for compulsory detention of its ships. See also Corr v Larkin, 2 ITR 164, where the taxpayer was held chargeable on sale proceeds from a loss of profits policy, and Gray v Penrhyn (Lord), (1937) 21 TC 252 where a successful claim against an auditor was held to be a trading receipt. But compensation treated as part of the proceeds of the compulsory sale of land may not be taxable as income: IRC v Glasgow and South Western Railway Co, (1887) 12 AC 315.

Damages received for loss of profits are generally taxed as trading income: Deeny and others v Gooda Walker Ltd, [1996] STC 39, which concerned damages received by Lloyd’s members from negligent agents. See also: Anglo-French Exploration Co Ltd v Clayson, (1956) 36 TC 545, Blackburn v Close Bros Ltd, (1960) 39 TC 164.

In the following cases, the court took account of taxation in deciding the amount of damages to be awarded: British Transport Commission v Gourley, (1955) 34 ATC 305; West Suffolk County Council v W Rought Ltd, (1956) 35 ATC 315; Spencer v MacMillan’s Trustees, (1958) 37 ATC 388; Thomas McGhie and Sons Ltd v British Transport Commission, (1962) 41 ATC 144; Lyndale Fashion Manufacturers Ltd v Rich, [1973] STC 32; Brayson v Wilmot-Breedon, (1976) 12 CL 56. See also Stoke-on-Trent City Council v Wood Mitchell and Co Ltd, [1979] STC 197.

Are receipts from disposal of assets taxable?

The disposal of a capital asset generally gives rise to a capital receipt; the disposal of a current asset gives rise to a trading receipt. Receipts from the sale of slag heaps were held to be capital in Beams v Weardale Steel Coal and Coke Co Ltd, (1937) 21 TC 204; Shingler v Williams (P) and Sons, (1933) 17 TC 574; Roberts v Belhaven’s (Lord) Executors, (1925) 9 TC 501; Rogers v Longsdon, (1966) 43 TC 231.

Profits on the disposal of investments were held to be capital in Dunn Trust (The) Ltd v Williams, (1950) 31 TC 477;Shiner v Lindblom, (1960) 39 TC 367 and IRC v Scottish Automobile and General Insurance Co Ltd, (1931) 16 TC 381. A sum received by a parent from the liquidation of a non-trading subsidiary was treated as a capital receipt in the hands of the parent: Guinness and Mahon v Browne, 3 ITR 373.

Proceeds from the sale of carriages previously leased to customers were held to be trading receipts in Gloucester Railway Carriage and Wagon Co Ltd v IRC, (1925) 12 TC 720.

Sales of investments by dealing companies were treated as trading receipts in Hesketh Estates Ltd v Craddock, (1942) 25 TC 1; Bolson (J) and Son Ltd v Farrelly, (1953) 34 TC 161; Associated London Properties Ltd v Henriksen, (1944) 26 TC 46. See also Frasers (Glasgow) Bank Ltd v IRC, (1963) 40 TC 698; Northern Assurance Co v Russell (1889) 2 TC 551. A sharedealer’s profit on exercising a call option is taxable, but not until the shares are sold: Varty v British South Africa Co Ltd, (1965) 42 TC 406.

Are exchange gains taxed as trading income?

A gain accruing to a trader on the disposal of foreign currency is generally regarded as trading income: Imperial Tobacco Co of Great Britain and Ireland v Kelly, (1943) 25 TC 292; Landes Bros v Simpson, (1935) 19 TC 62. But some currency gains may be capital: Davies v The Shell Company of China Ltd, (1951) 32 TC 133. See alsoBeauchamp v F W Woolworth plc, [1989] STC 510; Overseas Containers (Finance) Ltd v Stoker, [1989] STC 364.

Section 79 allows trade-related currency gains on hedging instruments to be treated as part of trading income. Corresponding payments are deductible revenue expenses.

Are grants subject to tax?

Capital grants are not taxable: Watson v Samson Bros, (1959) 38 TC 346; Seaham Harbour Dock Co v Crook, (1931) 16 TC 333.

Revenue grants are: Smart v Lincolnshire Sugar Co Ltd, (1937) 20 TC 643; Brown (Charles) and Co v IRC, (1930) 12 TC 1256; Burman v Thorn Domestic Appliances (Electrical) Ltd, [1982] STC 179. See also Poulter v Gayjohn Processes Ltd, [1985] STC 174 and McGowan v Brown and Cousins (trading as Stuart Edwards), [1977] STC 342. InO’Cléirigh v Jacobs International Ltd, 2 ITR 165, the Irish case in this regard, the court held that IDA training grants were taxable. Sections 225–227 now specifically exempt such government funded grants.

A medical research grant was taxed in Duff v Williamson, (1973) 49 TC 1.

A payment received from Bord Iascaigh Mhara, under the Emergency Grant Aid, to compensate a fisherman for poor earnings during adverse weather conditions is taxable as income (Revenue Precedent IT95-3549, 10 October 1995).

The tax treatment of grants which are received by traders, depends on the nature of the grant involved. Where a grant is of a capital nature it is not taken into account in arriving at trading profits but reduces the amount of expenditure which qualifies for capital allowances. Allowable costs for Capital Gains Tax purposes are also reduced by the amount of capital grants.

Grants of a revenue nature should be included when calculating trading profits. Where a payment is received which increases a trader’s income or reduces the trader’s revenue expenditure it is normally of a revenue nature and accordingly is liable to income tax or corporation tax as appropriate.

Employment grants and recruitment subsidies are payments of a revenue nature and accordingly are liable to income or corporation tax unless specifically exempted by tax legislation: Inspector Manual 4.1.10

Are ex-gratia payments subject to tax?

Capital ex-gratia payments are not taxable: Chibbett v Robinson (Joseph) and Sons, (1924) 9 TC 48; Ellis v Lucas, (1966) 43 TC 276; IRC v Brander and Cruikshank, (1970) 46 TC 574; Walker v Carnaby, Harrower, Barham and Pykett, (1969) 46 TC 561; Simpson v John Reynolds and Co (Insurances) Ltd, (1975) 49 TC 693; Murray v Goodhews, [1978] STC 207. In Lawson v Johnson Matthey plc, [1992] STC 466, it was held that a cash payment by a parent to a subsidiary prior to the sale of the subsidiary was a capital payment.

The relevant Irish case is Robinson (T/A J Pim and Son) v Dolan, 1 ITR 427.

In Rolfe v Nagel, [1981] STC 585, an ex gratia payment on termination of a contract was held to be a trading receipt.

Is reimbursement of expenditure subject to tax?

Reimbursement of capital expenditure is regarded as a capital receipt in the hands of the recipient: McLaren vNeedham, (1960) 39 TC 37. In that case, a payment from a petrol company to a petrol station owner, to be spent on improving the petrol station (i.e., for capital purposes) was regarded as a capital payment. Payments towards capital assets are treated as capital in the hands of the recipient: IRC v Coia, (1959) 38 TC 334, Saunders (Walter W) Ltd vDixon, (1962) 40 TC 329.

Reimbursement of revenue expenditure is regarded as a revenue payment: Evans v Wheatley, (1958) 38 TC 216. In that case, a payment by a petrol company to a petrol station owner to reimburse promotion expenses was held to be a revenue payment. Payments towards revenue expenditure are treated as trading receipts in the hands of the recipient:IRC v Falkirk Ice Rink Ltd, [1975] STC 434.

Is the sale of know-how subject to tax?

Know-how, patent and licensing receipts were held to be revenue receipts in British Dyestuffs Corporation (Blackley) Ltd v IRC, (1924) 12 TC 586; Brandwood v Banker, (1928) 14 TC 44; Jeffrey v Rolls-Royce Ltd, (1962) 40 TC 443;Musker v English Electric Co Ltd, (1964) 41 TC 556; Coalite and Chemical Products Ltd v Treeby, (1971) 48 TC 171;Thomsons (Carron) Ltd v IRC, [1976] STC 317; Sturge (John and E) Ltd v Hessel, [1975] STC 573.

Know-how receipts were held to be capital in Evans Medical Supplies Ltd v Moriarty, (1957) 37 TC 540; Murray v Imperial Chemical Industries Ltd, (1967) 44 TC 175.

How should trading profits be computed for tax purposes?

A trader’s profit for tax purposes must be based on accounts that have been prepared using accepted principles of commercial accountancy i.e., the accruals basis: Gresham Life Assurance Society Ltd v Styles, (1890) 3 TC 185,Heather v P E Consulting Group Ltd, (1972) 48 TC 293. Accounts should be prepared on a historical cost basis, not a current cost basis: P J Carroll and Co Ltd v O’Culacháin, 4 ITR 135. In accounts prepared on a historic cost basis the date of receipt of progress payments was ignored in Symons v Weeks and Others, [1983] STC 195.

The accruals basis has been considered in Hall (J P) and Co Ltd v IRC, (1921) 12 TC 382; Dailuaine-Talisker Distilleries Ltd v IRC, (1930) 15 TC 613; IRC v Bell (Arthur) and Sons Ltd, (1932) 22 TC 315; IRC v Gardner Mountain and D’Ambrumenil Ltd, (1947) 29 TC 69; IRC v Oban Distillery Co Ltd, (1932) 18 TC 33 and Wright Sutcliffe Ltd v IRC, (1929) 8 ATC 168. Deposits were considered in Cronk (John) and Sons Ltd v Harrison, (1936) 20 TC 612 and Chibbett v Harold Brookfield and Son Ltd, (1952) 33 TC 467.

Profit is not to be anticipated i.e., unrealised “paper” profits are ignored: Willingale v International Commercial Bank Ltd, [1978] STC 75; Pattison v Marine Midland Ltd, (1983) 57 TC 219, [1984] STC 10; Gallagher v Jones, [1993] STC 534.

A subjective judgment made in the course of preparing the accounts (for example, in relation to depreciation policy, stock valuation) does not invalidate the accounts if the judgment was made in accordance with accounting principles:Johnson v Brittania Airways Ltd, [1994] STC 763. See also Odeon Associated Theatres Ltd v Jones, (1971) 48 TC 257;Chancery Lane Safe Deposit and Offices Co Ltd v IRC, (1965) 43 TC 83.

How should stock be valued?

Stock should be valued at the lower of cost and market value: Whimster and Co v IRC, (1925) 12 TC 813, IRC v Cock Russell and Co Ltd, (1949) 29 TC 387. Stock must be valued when a trade is discontinued (section 89).

For the meaning of cost, see Duple Motor Bodies Ltd v Ostime, (1961) 39 TC 537, and AB Ltd v MacGiolla Riogh, (1960) 2 ITR 419, discussed in Obscure Cases Revisited (3), Suzanne Kelly, Irish Tax Review, January 1998.

For the meaning of market value see Brigg Neumann and Co v IRC, (1928) 12 TC 1191, and BSC Footwear Ltd v Ridgway, (1971) 47 TC 495. See also IRC v Huntley and Palmers Ltd, (1928) 12 TC 1209. The base stock method is not to be used in valuing stock: Patrick v Broadstone Mills Ltd, (1953) 35 TC 44. Opening and closing stock should be valued on the same basis: Bombay Commissioner of Income Tax v Ahmedabad New Cotton Mills Co Ltd, (1929) 9 ATC 574 but see Pearce v Woodall-Duckham, Ltd, [1978] STC 372.

For the purposes of stock relief (now repealed except for farmers – section 666), the value of stock for sale should exclude deposits received: O’Laoghaire v CD Ltd, (1983) 3 ITR 51.

Stock not yet received should not be included in the closing stock figure in the profit and loss account: Green and Co (Cork) Ltd v Revenue Commissioners, 1 ITR 130; Revenue Commissioners v Latchford and Sons Ltd, 1 ITR 240. But see Murnaghan Bros Ltd v O’Maoldomhnaigh, (1990) 4 ITR 304, in which the court held that failure to acquire actual possession of stock does not disentitle the acquirer from including it in his accounts.

Stock removed from the business should be brought into account as if the stock had been sold at market value:Sharkey v Wernher, (1955) 36 TC 275. This rule also applies to dealings with third parties: Petrotim Securities Ltd v Ayres, (1963) 41 TC 389, but does not apply to professions (see Case II below). A trader can use it to his/her advantage to bring stock he/she has received for nothing into his/her accounts at market value: Ridge Securities Ltd v IRC, (1964) 44 TC 373. As to the Irish application of this rule, see Obscure Tax Cases Revisited, Ciaran Ramsay, Irish Tax Review, September 1999).

The cost of work in progress taken over with a business is not deductible: City of London Contract Corporation v Styles (1887) 2 TC 239.

Trading stamp operators are taxed on receipts from sale of stamps: B D Cowen (trading as Ideal Trading Stamp Co) and Cowen’s Ideal Trading Stamp Co (Glasgow) Ltd v IRC, (1934) 19 TC 155.

Compensation of a revenue nature is usually taxed at the time of agreement, Short Brothers Ltd v IRC, (1927) 12 TC 955; Sunderland Shipbuilding Co Ltd v IRC, (1926) 12 TC 955. IRC v Northfleet Coal and Ballast Co Ltd, (1927) 12 TC 1102; Bush, Beach and Gent. Ltd v Road, (1939) 22 TC 519; Greyhound Racing Assn (Liverpool) Ltd v Cooper, (1936) 20 TC 373; Shove v Dura Manufacturing Co Ltd, (1941) 23 TC 779, Sommerfields Ltd v Freeman, (1966) 44 TC 43;Pretoria Petersburg Railway Co Ltd v Elwood, (1908) 6 TC 508; Roberts v W S Electronics Ltd, (1967) 44 TC 525.

Retrospective changes in agreed compensation are to be backdated into the chargeable period to which they relate:English Dairies Ltd v Phillips, (1927) 11 TC 597; Isaac Holden and Sons Ltd v IRC, (1924) 12 TC 768; IRC v Newcastle Breweries Ltd, (1927) 12 TC 927; Lambert Bros Ltd v IRC, (1927) 12 TC 1053; Ensign Shipping Co Ltd v IRC, (1928) 12 TC 1169; Robinson (Jesse) and Sons v IRC, (1929) 12 TC 1241; Frodingham Ironstone Mines Ltd v Stewart, (1932) 16 TC 728; New Conveyor Co Ltd v Dodd, (1945) 27 TC 11; Severne v Dadswell, (1954) 35 TC 649; North v Spencer’s Executors and C H Spencer, (1956) 36 TC 668; Bernhard v Gahan, (1928) 13 TC 723; Simpson v Jones, (1968) 44 TC 599. See also British Mexican Petroleum Co Ltd v Jackson, (1932) 16 TC 570; IRC v Titaghur Jute Factory Ltd, [1978] STC 166.

Trade-in assets received are brought into the accounts at market value: Westminster Bank Ltd v Osler, (1932) 17 TC 381; Gold Coast Selection Trust Ltd v Humphrey, (1948) 30 TC 209.

Under the ordinary rules of commercial accounting, a solicitor’s clients become debtors of the firms when issued with a bill of costs. Accordingly, the amount shown on the bill of costs should be included as debtors in the firm’s accounts (Revenue Precedent IT97-2508, 5 September 1997).

Case II

What is a profession?

For the meaning of “profession” see notes to section 3. The following activities have been held to be professions:

(a) Headmaster of a preparatory school: IRC v North and Ingram, (1918) 2 KB 705.

(b) Journalist: IRC v Maxse, (1919) 12 TC 41.

(c) Architect: Durant v IRC, (1921) 12 TC 245 (obiter).

(d) Actress: Davies v Braithwaite, (1931) 18 TC 198. See also Higgs v Olivier, (1952) 33 TC 136.

(e) Barrister: Seldon v Croom-Johnston, (1932) 16 TC 740. A barrister who on appointment as judge transferred his interest in uncollected fees to a company was held to be personally chargeable on such receipts: O’Coindealbháin v Gannon, 3 ITR 484.

(f) Optician (oculist): Carr v IRC, [1944] 2 All ER 163; but not a trade of selling spectacles (ophthalmic optician):Webster v IRC, [1942] 2 All ER 517; Neild v IRC, [1948] 2 All ER 1071.

(g) Person responsible for marketing artistes’ songs: Radcliffe v IRC, (1956) 56 Taxation 512.

(h) Property valuer: IRC v Peter McIntyre Ltd, (1927) 12 TC 1006; Ward Bateson and Smith v IRC, (1948) 27 ATC 169.

(i) Estate management agent: Escrit and Barrell v IRC, (1947) 26 ATC 33.

(j) A local manager for the Department of Social Welfare who was contractually obliged to provide his own premises and staff: O’Coindealbháin v Mooney, 3 ITR 45.

(k) An insurance agent whose activities were not directly controlled by the company for which he/she acted:MacDermott v Loy, HC 29 July 1982.

(l) Fishing crewmen entitled to share the catch proceeds jointly: McLoughlin v Director of Public Prosecutions, 3 ITR 387. See Inspector Manual 4.1.10.

The following activities have been held not to be professions:

(a) Accountant (unqualified): Currie v IRC, (1921) 12 TC 257. In the following year the Crown did not contest the decision of the General Commissioners that the taxpayer was carrying on a profession.

(b) Photographer: Cecil v IRC, (1919) 36 TLR 164; Crooke v Easson, [1920] SC 721.

(c) Insurance broker: Durant v IRC, (1921) 12 TC 245.

(d) Stockbroker: Christopher Barker and Sons v IRC, [1919] 2 KB 222.

(e) Dance band leader: Loss v CIR, (1945) 2 All ER 683.

(f) Film producer: Asher v London Film Productions Ltd, [1944] 1 All ER 77.

(g) Chartered secretary (where the firm also sold goods): Burt and Co v IRC, [1919] 2 KB 650.

Revenue accept that services provided by the following persons are professional services:

(a) An auctioneer/estate agent.

(b) A quantity surveyor.

Revenue do not accept that services provided by the following persons are professional services:

(a) A public relations company.

(b) An insurance broker.

(c) A livestock auctioneer in a cattle mart.

(Revenue Precedent CTF101.1, 30 June 1994).

What is a vocation?

“Profession” includes a vocation or calling. The following activities have been held to be vocations, and therefore professions:

(a) Bookmaker: Partridge v Mallandaine, (1886) 2 TC 179. Profits arising to a bookmaker from dealing in drawn sweepstake tickets were regarded as part of his bookmaking profits: HH v Forbes, 3 ITR 178.

(b) Jockey: Wing v O’Connell, 1 ITR I55 (see also list in Schedule 23A).

Revenue have accepted a CCJ decision that a payment over and above the fee charged was not a receipt of the profession, but a personal gift (Revenue Precedent 83-4265, 12 December 1983). See also Calvert v Wainwright, (1947) 27 TC 475, and O’Reilly v Casey, 1 ITR 601.

An amateur sportsman is a sportsman who engages in sport purely for recreational purposes, i.e., he/she is not carrying on a trade or profession as a sportsman, and is not an employee of the body providing the gift. In such a case, the gift is not taxable in the hands of the recipient. This is not a general ruling; the circumstances of each case must be considered (Revenue Precedent IT96-2011, 4 December 1996).

A payment received by an amateur sportsman from the media is taxable and should be included in the recipient’s tax return (Revenue Precedent IT89-2043, 15 November 1989).

(c) Land agent: Humphrey v Peare, (1913) 6 TC 201.

(d) Author, dramatist: Glasson v Rougier, (1944) 26 TC 86; Billam v Griffith, (1941) 23 TC 757; Withers v Nethersole, (1948) 28 TC 501. Receipts for sales of manuscript papers are regarded as part of an author’s professional receipts:Wain v Cameron, [1995] STC 555.

A receipt in respect of the sale of copyright is a revenue item, and subject to income tax (or corporation tax) if the seller’s activities are in the nature of a trade. If not the receipt is capital, and the consideration is subject to capital gains tax.

(e) Professional singer: Taylor v Dawson, (1938) 22 TC 189.

(f) Newspaper racing tipster: Graham v Arnott, (1941) 24 TC 157.

The following activities have been held not to be vocations:

(a) Professional gambler: Graham v Green, (1925) 9 TC 309.

(b) Winnings received by a golf professional from betting on his own matches: Down v Compston, (1937) 21 TC 60.

The rule in Sharkey v Wernher (see Case I, Accounting rules) that stock removed from a business should be brought into account as if it had been sold at market value does not apply to professional persons: Mason v Innes, (1967) 44 TC 326.

Can a company carry on a profession?

The UK courts have indicated that a company cannot carry on a profession or vocation: William Esplin v IRC, (1919) 2 KB 731, IRC v Peter McIntyre Ltd, (1927) 12 TC 1006. But a company can provide professional services: MacGiolla Mhaith v Brian Cronin and Associates Ltd, 3 ITR 211.

Profits accruing to a company from exploiting the services of an actress were taxed under the UK Case IV in Black Nominees Ltd v Nicol, [1975] STC 372. A capital payment in respect of the sale by an individual of the right to his future professional income is taxed as income under UK TA 1988 section 775, which was introduced following the decision inJohn Mills Productions Ltd v Mathias, (1967) 44 TC 441. There is no equivalent charge under Irish law, but seeO’Coindealbháin v Gannon, 3 ITR 484 where a barrister was held personally chargeable on post-cessation receipts assigned to a company at the time of his appointment as a judge.

Are clergymen professionals?

The vocational earnings of clergymen of the Church of Ireland are chargeable to tax under Case II of Schedule D. (Inspector Manual 4.1.13)

Case III(a)

What is “pure income profit”?

The income charged under Schedule D Case III is charged without any deduction for expenses and therefore is often referred to as “pure income profit” (see annual payments below).

The income is taxed when it is received by the recipient’s bank: Simpson v Maurice’s Executors, (1929) 14 TC 580. Contrast Paton v IRC, (1938) 21 TC 626, in which it was held that interest is not paid to a bank merely by being debited to an account. See also Macarthur v Greycoat Estates Mayfair Ltd, [1996] STC 1. A cheque is regarded as received when it is credited to the recipient’s bank account: Parkside Leasing v Smith, (1985) 58 TC 282. No income arises if the payment is never received: Woodhouse v IRC, (1936) 20 TC 673.

Unrelieved expenses incurred in unpaid jobs may not be deducted from Schedule D Case III: Shaw v Tonkin, [1988] STC 186.

Subscriptions are not pure income profit in the hands of the recipient organisation: IRC v National Book League, (1957) 37 TC 455, Taw and Torridge Festival Society Ltd v IRC, (1959) 38 TC 603.

What is interest?

Interest is “payment by time for the use of money”: Bennett v Ogston, (1930) 15 TC 374. It is “compensation for the use … by one person of … money belonging to … another”: Re Euro Hotel (Belgravia) Ltd, [1975] STC 682. Where a sum borrowed is repaid within a short time, and the amount repaid exceeds the amount borrowed, the excess is not always “interest”: Ridge Securities Ltd v IRC, (1964) 44 TC 373. To be characterised as interest, the rate of interest must be just. An unreasonably large payment may not qualify as interest: Cairns v McDiarmid, [1983] STC 178. See alsoWestminster Bank Ltd v Riches, (1947) 28 TC 159, Chevron Petroleum (UK) Ltd v BP Development Ltd, [1981] STC 689.

The time a loan is made is the time it was advanced (not a time at which it is outstanding): West v Crossland, [1999] STC 147, which dealt with taxation of preferential employee loans.

Short interest is interest on a loan with a repayment period of less than one year, for example, overdraft interest:Walcot-Bather v Golding, [1979] STC 707. Such interest may be paid gross.

Annual (yearly) interest, i.e., interest on a loan with a repayment period of one year or more, must be paid under deduction of tax. See also IRC v Hay, (1924) 8 TC 636; Barlow v IRC, (1937) 21 TC 354; Goslings and Sharpe v Blake(1889) 2 TC 450; Garston Overseers for the Poor v Carlisle, (1915) 6 TC 659; Re Cooper, (1911) 105 LT 273; Regal (Hastings) Ltd v Gulliver, (1944) 24 ATC 297; IRC v Viscount Broome’s Executors, (1935) 19 TC 667 and Corinthian Securities Ltd v Cato, (1969) 46 TC 93. See also Minsham Properties Ltd v Price, [1990] STC 718.

Interest added to capital remains interest: IRC v Oswald, (1945) 26 TC 435.

Interest includes:

(a) A repayment premium (see example to Case III above): IRC v Thomas Nelson and Sons Ltd, (1938) 22 TC 175.

(b) Disguised interest: Howard de Walden (Lord) v Beck, (1940) 23 TC 384; Lilley v Harrison, (1952) 33 TC 344.

(c) Interest receivable by a building society on mortgage repayments: Leeds Permanent Benefit Building Society v Mallandaine (1897) 3 TC 577.

(d) Interest received by life assurance companies: Clerical Medical and General Life Assurance Co v Carter (1889) 2 TC 437; Revell v Edinburgh Life Insurance Co, (1906) 5 TC 221; Australian Mutual Provident Society v IRC, (1947) 28 TC 388; Ostime v Australian Mutual Provident Society, (1959) 38 TC 492.

(e) Current account interest: IRC v Imperial Tobacco Co (of Great Britain and Ireland) Ltd, (1940) 29 TC 1.

(f) Court-awarded interest: Schulze v Bensted (No 1), (1915) 7 TC 30 and Sweet v MacDiarmid (or Henderson), (1920) 7 TC 640, if the award is truly of interest: IRC v Barnato, (1936) 20 TC 455; and not merely part of the measure of the damages: IRC v Ballantine, (1924) 8 TC 595. See also Riches v Westminster Bank Ltd, (1947) 28 TC 159; The Norseman, (1957) 36 ATC 173. See also Revenue Precedent IT91-3520, 20 February 1991.

(g) The interest component of total sales proceeds: Hudsons Bay Co v Thew, (1919) 7 TC 206, Ruskin Investments Ltd v Copeman, (1943) 25 TC 187.

(h) Purchased annuities: Perrin v Dickson, (1929) 14 TC 608.

(i) Interest received during liquidation: Irish Provident Institution v Brown, (1921) 8 TC 57. In Irish Provident Assurance Co Ltd (in liquidation) v Kavanagh, 1 ITR 45, deposit interest arising during liquidation was chargeable on the liquidator.

(j) Receipts in kind: IRC v Baillie, (1936) 20 TC 187.

(k) Interest from loans made to foreign customers: Scottish Mortgage Co of New Mexico v McKelvie (1886) 2 TC 165, Butler v Mortgage Co of Egypt Ltd, (1928) 13 TC 803, unless very short term in which case Schedule D Case I applies: Smiles v Australasian Mortgage and Agency Co Ltd (1886) 2 TC 367.

(l) Interest on bonds issued to foreign customers: Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece, (1970) 46 TC 472.

Interest means gross interest; the use to which the money is put by the recipient does not affect the liability: Phillips v Limerick Co Council, (1925) ITR 66.

Interest does not include:

(a) Interest not actually received: St Lucia Usines and Estates Co Ltd v Colonial Treasurer of St Lucia, (1924) 4 ATC 112; Lambe v IRC, (1933) 18 TC 212; Dewar v IRC, (1935) 19 TC 561; Woodhouse v IRC, (1936) 20 TC 673. Interest on solicitor’s client accounts, and interest earned by guarantors: see notes to section 52.

This approach was recently confirmed in Girvan v Orange Personal Communication Services Ltd, [1998] STC 567, where the court decided that interest is received when it enures to the recipient’s benefit and he/she can call for it – in that case, interest accrued on the closure of the account (not on the quarterly crediting date).

(b) Interest accrued on the sale of securities which is part of the proceeds of sale: Wigmore v Summerson (Thomas) and Sons Ltd, (1925) 9 TC 577 and IRC v Oakley, (1925) 9 TC 582. See also Schaffer v Cattermole, [1980] STC 650, and section 815 which now taxes such interest.

(c) Interest, accrued at death, charged on a deceased: Monks v Fox’s Executors, (1927) 13 TC 171; Mitchell v IRC, (1933) 18 TC 108.

(d) Payment by a guarantor: IRC v Holder and Holder, (1932) 16 TC 540; Hendy v Hadley, [1980] STC 292.

What is an annuity?

An annuity arises “where an income is purchased with a sum of money and the capital has gone and has ceased to exist, the principal having been converted into an annuity”: Foley v Fletcher, (1858) 3 H and N 769, 7 WR 141. For an Irish case, see McCabe v South City and County Investment Company Ltd, (1997) ITR 107.

What is an annual payment?

To be “annual” a payment must have the quality of recurrence, but that does not mean that it need actually recur: Moss’ Empires Ltd v IRC, (1936) 21 TC 264.

An annual payment is a payment that is pure income profit in the hands of the recipient. The recipient must incur no expense in return for the annual payment: Re Hanbury (deceased), (1939) 38 TC 588; Earl Howe v IRC, (1919) 7 TC 289; Campbell v IRC, (1968) 45 TC 427; Essex County Council v Ellam, [1989] STC 317.

In Taw and Torridge Festival Society Ltd v IRC, (1959) 38 TC 603, a charitable society received donations from its members in return for priority booking of theatre seats at a reduced rate. The donations were held not to be annual payments as the society provided reduced rate seating in return.

Maintenance payments were charged in Briggenshaw v Crabb, (1948) 30 TC 331. See now sections 1025–1026 which deal with maintenance payments made between spouses who have become legally separated or divorced.

In Marchioness Conyngham v Revenue Commissioners, 1 ITC 259, [1928] ILRM 57, (discussed in Obscure Cases Revisited (6), Suzanne Kelly, Irish Tax Review, July 1998), a life tenant of a property was held not chargeable on sums received towards the upkeep and maintenance of the property. The income was not regarded as pure income profit in the hands of the recipient as it was already earmarked for expenditure on the property. Contrast Phillips v Limerick Co Council, (1925) ITR 66 where earmarked interest was taxed.

Other annual payments were held chargeable in: Leahy v Hawkins, (1952) 34 TC 28; Mitchell v Rosay, (1954) 35 TC 496; McMann v Shaw, (1972) 48 TC 330, Westminster Bank Ltd v Barford, (1958) 38 TC 68; Morning Post Ltd v George, (1940) 23 TC 514; Blake v Imperial Brazilian Railway Co (1884) 2 TC 58; Nizam’s Guaranteed State Railway Co v Wyatt (1890) 2 TC 584, and Duncan’s Executors v Farmer, (1909) 5 TC 417.

See also Laird v IRC, (1929) 14 TC 395, which dealt with war injury payments, and Forsyth v Thompson, (1940) 23 TC 374 which dealt with income from a permanent health benefit scheme (now taxed under section 125).

Case III(b)

What is a discount?

See example to Case III. In distinguishing whether a payment is interest, a premium or a discount, one must ask what is the true nature of the payment? A loan may be issued at a premium and also carry interest.

In Lomax v Peter Dixon and Son Ltd, (1943) 25 TC 353, Lord Greene MR outlined the following rules to decide the nature of a payment:

(a) Whether a payment is interest, a premium or a discount is a question of fact, not of law.

(b) In deciding as a question of fact what the nature of the payment is, the factors to be taken into account are: the contract, the term of the loan, the interest rate, and the risk involved.

(c) If a loan carries both interest and a premium/discount, and the interest rate is reasonable, there is no presumption that the premium/discount is disguised interest.

Discount may include:

(a) A profit made on the sale of a treasury bill: National Provident Institution v Brown, (1921) 8 TC 57.

(b) Interest disguised as a premium on repayment: Davies v Premier Investment Co Ltd, (1945) 27 TC 27 andWilson v Mannooch, (1937) 21 TC 178.

(c) A discount on issue: Ditchfield v Sharp, [1983] STC 590. In that case, it was held that the profit made by honouring in full a £2,399,000 four year promissory note that had been acquired for £1,780,000 was income from a discounting transaction.

Case III(f)

What is income from a foreign possession (see also section 71)?

Income from foreign property may include, for example:

(a) Profits from a trade or profession controlled from abroad, including a foreign partnership: Colquhoun v Brooks,(1889) 2 TC 490; San Paolo (Brazilian) Railway Company Ltd v Carter, (1896) 3 TC 407; Trustees of Ferguson deceased v Donovan, 1 ITR 183; O’Connell v R, 3 ITC 167, [1956] IR 97, Newstead v Frost, [1980] STC 123.

A trade controlled from the State is charged under Schedule D Case I, Ogilvie v Kitton, (1908) 5 TC 338, Spiers v Mackinnon, (1929) 14 TC 386. To be charged under Case III, the trade must be carried on entirely abroad. If carried on partly in Ireland and partly abroad, it is taxed under Schedule D Case I or II as appropriate: Davies v Braithwaite, (1931) 18 TC 198.

(b) Foreign alimony (annuity) receivable by a UK resident: IRC v Anderström, (1928) 13 TC 482;

(c) Income from foreign investments. This includes scrip dividends from foreign companies: Poole v Guardian Investment Trust Co Ltd, (1921) 8 TC 167; Associated Insulation Products, Ltd v Golder, (1944) 26 TC 231; but seeLawson v Rolfe, (1969) 46 TC 199. It also includes dividends from capital profits: IRC v Reid’s Trustees, (1949) 30 TC 431.

(d) Foreign annuities: Chamney v Lewis, (1932) 17 TC 318.

(e) Income from land or buildings located abroad.

(f) Income from a foreign employment.

(g) Income from a foreign pension: Bridges v Watterson, (1952) 34 TC 47, and like payments, McHugh v A, 2 ITR 393, including a retirement pension payable by the British Government: Forbes v Dundon, (1964) 2 ITR 491, [1964] IR 447. For a recent case, see Albon and anor v IRC, [1998] STC 1181, where the recipient of a US and a French pension was held chargeable to tax.

The following have not been regarded as income from a foreign possession:

(a) A dividend from a company incorporated in the US but resident in the UK: Bradbury v English Sewing Cotton Co Ltd, (1923) 8 TC 481.

(b) A company distribution which is a refund of capital: Rae v Lazard Investment Co Ltd, (1963) 41 TC 1; Courtaulds Investments Ltd v Fleming, (1969) 46 TC 111.

(c) Remuneration paid in the UK even if all the duties are performed abroad: Pickles v Foulsham, (1925) 9 TC 261;Bennet v Marshall, (1938) 22 TC 73.

In the case of trust, no deduction is allowed for foreign trust administration expenses overseas: Nelson v Adamson, (1941) 24 TC 36, Aikin v Macdonald’s Trustees (1894) 3 TC 306.

Disability benefit receivable by an Irish resident under a US insurance policy is taxable under Case III(f) (Revenue Precedent IT90-3513, 12 December 1990).

Income from Tax Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs) is exempt under UK tax law (ICTA 1988 sections 326A, 333). Such income is not exempt in the hands of an Irish resident, and is chargeable under Case III(f) (Revenue Precedent RT/136/97, 6 June 1997).

The exchange rate to be used to convert foreign dividend income to Irish pounds is the exchange rate which applied to the dividend on encashment (Revenue Precedent IT91-3539, 15 March 1991)

Dividends from a UK company: Tax Briefing 40.

Case V

For consideration of the meaning of rents, see Martin v Routh, (1964) TC 106; Jeffries v Stephens, [1982] STC 639.

Income from conacre letting is assessable under Case V (Inspector Manual 4.8.5, 4.8.6).

A “boarding-out allowance” paid by a health board (under SI 225/1993) to a person (landlord) who provides board to an elderly person is taxable. There is no exemption (Revenue Precedent IT97-2515, 19 November 1997).

Rental-income-related currency gains on hedging instruments may be treated as part of rental income. Corresponding payments are deductible as revenue expenses (Statement of Practice SP CT/1/91).

Case IV

Capital receipts are not chargeable under Case IV. Neither are isolated transactions (adventures in the nature of trade):Leeming v Jones, (1930) 15 TC 333. In that case, the taxpayer was assessed under the UK equivalent of Schedule D Case IV on the profit arising on the assignment of options over rubber estates. The court held that as the transaction was not an adventure in the nature of trade, the profit was not assessable under any Schedule or Case (not just Case I). In Pearn v Miller, (1927) 11 TC 610, profits from a probable trading activity were held not to be assessable under the UK Case IV.

There is no professional equivalent to an adventure in the nature of trade. Profits arising on one-off professional engagements are chargeable under Schedule D Case IV. In Hobbs v Hussey, (1942) 24 TC 153, a solicitor’s clerk was assessed under the UK Case IV on profits arising from the sale of his life story to a newspaper. The taxpayer said the payment was a capital receipt for the sale of copyright. The payment was held to be a payment for services provided. Similar decisions were made in Housden v Marshall, (1958) 38 TC 233 and Alloway v Phillips, [1980] STC 490.

Profits accruing to a company from exploiting the services of an actress were taxed under the UK Case IV in Black Nominees Ltd v Nicol, [1975] STC 372. See also notes to Case II. A capital payment in respect of the sale by an individual of the right to income from supplying his professional services is taxed under UK law (TA 1988 section 775) but not under Irish law.

Miscellaneous profits taxed under Case IV have included:

(a) Casual commissions not amounting to a trade: Ryall v Hoare, (1925) 8 TC 521 and Sherwin v Barnes, (1931) 16 TC 278; Lyons v Cowcher, (1926) 10 TC 438;Grey v Tiley, (1932) 16 TC 414.

(b) Insurance commission other than to a broker or professional agent: Way v Underdown, (1974) 49 TC 215, 648;Hugh v Rogers, (1958) 38 TC 270.

(c) Dealings in cotton futures by a commodity broker: Cooper v Stubbs, (1925) 10 TC 29; and by a non-broker:Townsend v Grundy, (1933) 18 TC 140.

(d) Income from letting of racehorses: Norman v Evans, (1964) 42 TC 188.

(e) Payments to a retired partner under a consultancy agreement, where the services provided were negligible: Hale v Shea, (1964) 42 TC 260.

(f) Shipping dues: IRC v Forth Conservancy Board (No 1), (1928) 14 TC 709 and (No 2), (1931) 16 TC 103; unless a sale of a capital asset: Haig (Earl) Trustees v IRC, (1939) 22 TC 725; Beare v Carter, (1940) 23 TC 353; Nethersole v Withers, (1948) 28 TC 501.

(g) Miscellaneous royalties for sand and gravel: T and E Holmes Ltd v Robinson, [1979] STC 351. See section 56which taxes profits from quarries.

(h) A profit arising from an uncompleted sale of patent rights: Green v Brace, (1960) 39 TC 281.

An individual won the grand prize in a US State lottery. The winnings were to be paid to the individual in 20 annual instalments, and under the US tax code, were treated as income. Such payments would be treated as income if the taxpayer became resident in Ireland (Revenue Precedent IT95-3503, 11 April 1995).

The Case IV charge does not apply to:

(a) Profits from dealing in shares: Trenchard v Bennet, (1933) 17 TC 420; Whyte v Clancy, (1936) 20 TC 679. Such gains are regarded as capital, arising on the realisation of an investment.

(b) A gift, not being income: Bradbury v Arnold, (1957) 37 TC 665; Bloom v Kinder, (1958) 38 TC 77; Scott v Ricketts, (1967) 44 TC 303 and Dickinson v Abel, (1968) 45 TC 353. But see Brocklesbury v Merricks, (1934) 18 TC 576 where the recipient of the gift was contractually entitled to demand payment of the gift.

Can income be taxed under another Case?

(3) Although income has been generally categorised above as belonging to Cases I-V, it may, where appropriate, be categorised for particular purposes as belonging to another case. For example, illegal profits from a trade are not liable under Case I; they are liable under Case IV.

What is Schedule E?

(1) Schedule E is the heading under which income from an office or employment exercised in the Republic of Ireland is taxed.

What is an “office”?

An office is a post that is filled by an “office holder” (for example a customs officer). It is “a subsisting, permanent, substantive position which had an existence independent of the person who filled it, which went on and was filled in succession by successive holders…”: Rowlatt J in Great Western Railway Company v Bater, (1920) 8 TC 231.

The following are regarded as officeholders:

(a) a director of a company: Lee v Lee’s Air Farming Ltd, [1961] AC 12,

(b) a trustee or executor: Dale v IRC, (1953) 34 TC 468,

(c) a company auditor: Ellis v Lucas, (1966) 43 TC 276,

(d) a local charges registrar: Ministry of Housing v Sharpe, 2 All ER 225.

An office is “permanent” if there is a possibility of it continuing when the present occupant dies or vacates the position. For example, in the case of an election returning officer, the office is still required at each election although the returning officer may change at each election. In Edwards v Clinch, [1981] STC 617, it was held that a civil engineer who occasionally acted as an inspector in Department of the Environment local public enquiries was not an “officer” as there was no “office” which existed independently of its holder.

In Tipping v Jeancard, (1947) 2 ITR 68, the taxpayer was held chargeable under Schedule E on the basis that he held an office (as director of a company incorporated and registered in the State) even though he never exercised the office in the State.

An employment is “more or less analogous to an office”: Davies v Braithwaite, (1931) 18 TC 198. It is a master-servant contract i.e., a contract of services between an employer and his employee, as opposed to a contract for services between a professional person and client.

Employed or self-employed?

“A contract of service implies an obligation to serve and it comprises some degree of control by the master”: Chadwick v Pioneer Private Telephones Ltd, [1941] 1 All ER 522. “A servant is a person subject to the command of his master as to the manner in which he shall do his work”: Yeomans v Noakes, (1880) 6 QBD 530.

Income you receive under a contract of (employment) service is taxed under Schedule E.

Income you receive under a contract for services is taxed under Schedule D Case I or II: Market Investigations Ltd v Minister for Social Security, [1968] 3 All ER 732.

In Davies v Braithwaite, (1931) 18 TC 198, a professional actress claimed that each contract on which she was engaged was a separate employment and so only the income from employments performed in the UK was taxable. The court held that she carried on a single profession, and was taxable on her worldwide income. This decision may be contrasted with the decision in Fall v Hitchen, (1972) 49 TC 433. In that case, a ballet dancer who made several engagements under a standard form contract approved by the British Actors’ Equity Union was held to be an employee.

In Hall v Lorimer, [1994] STC 23, a freelance vision mixer worked on short-term contracts for 20 different production companies. The UK Inland Revenue argued that each short-term contract was an employment contract, as the taxpayer could not dictate the hours or place of work. The Court of Appeal held that he was self-employed, because he took on the risk of bad debt (which is not normal for employment contracts).

What are the characteristics of employment?

You are normally regarded as an employee if you are hired under terms and conditions which include some or all of the following features:

(a) you are under the control of the site foreman/overseer who directs how, when and where your work is to be carried out,

(b) you do not supply materials for the job,

(c) you do not provide plant and machinery other than handtools,

(d) you do not engage his/her own helpers,

(e) you do not sub-contract the work,

(f) you are not exposed to financial risk in carrying out the work,

(g) you receive an agreed weekly/monthly wage,

(h) you are entitled to extra pay for overtime,

(i) you are entitled to sick/holiday pay etc,

(j) you receive country money or expense payments to cover subsistence and/or travel,

(k) you are transported from site to site at the expense of the employer,

(l) you supply labour only,

(m) you contribute to the industry pension and sick pay scheme,

(n) union dues are deducted from payments to you,

(o) you are employed under conditions which comply with relevant registered agreements.

The fact that you are paid by results (a piece worker) does not automatically mean you are a self-employed contractor.

The following were regarded as employed under a contract of service:

(a) Deepsea dockers who shared pooled earnings of the stevedores: Louth and others v Minister for Social Welfare, [1995] 1 IR 238.

(b) A supermarket product demonstrator: Denny (Henry) and Sons (Ireland) Ltd v the Minister for Social Welfare,[1995] ITR 209.

(c) A part-time hospital consultant: Mitchell and Edon v Ross, (1961) 40 TC 11. Medical doctors can be treated as employed or self-employed, depending on the terms of the contract: Inspector Manual 4.1.4, 5.1.1.

(d) Potato gang workers (as employees of the gang leader): Andrews v King, [1991] STC 481.

(e) An evening class teacher: Fuge v McClelland, (1956) 36 TC 571. This case involved a full-time teacher who also taught adult evening courses.

(f) A “partner” in receipt of salary, but not a profit share: Horner v Hasted, [1995] STC 766.

(g) A part time lecturer: Lindsay v IRC, (1964) 41 TC 661. See also Sidey v Phillips, [1987] STC 87 (non-practising barrister assessable under Schedule E on part-time lecturing fees), Walls v Sinnett, [1987] STC 236 (a professional singer who lectured in music at a technical college for 4 days each week was assessable under Schedule E), andBarcroft v Minister for Health and Social Welfare and James Agnew (Social Welfare Appeals Officer), a 1986 High Court decision, where it was held that teachers performed their work under a contract of service and their employments were insurable.

Revenue accepts that lecturers/teachers/trainers who give “once off” lectures (for example, once or twice a year for the same body) are not employees. Revenue do not accept that lecturers/teachers/trainers who give a series of “once off” or guest lectures for the same body are outside the scope of PAYE/PRSI (Tax Briefing 28, October 1997 Inspector Manual 5.1.12, 18.1.1)

(h) A holder of a grant or research fellowship under the EU Human Capital and Mobility Programme is regarded as an employee of the Irish Institute to which he/she is attached. (section 826) (Revenue Precedent RT/406/94, 5 July 1996).

What are the characteristics of self-employment?

You are normally regarded as self-employed if you are hired under terms and conditions which include some or all of the following features:

(a) you are in business on your own account and provide the same services concurrently to others,

(b) you have a fixed place of business to take orders, bookings for contracts, store materials and equipment etc.,

(c) you provide the materials for the job,

(d) you provide your own plant and equipment,

(e) you provide your own insurance cover under the appropriate heading, for example, public liability etc,

(f) you are not under the direction or control of the site foreman/overseer as to the method to be employed in carrying out the work,

(g) you control your own hours of work in fulfilling the obligations of the contract,

(h) you hire helpers at your own expense,

(i) if appropriate you are registered for VAT,

(j) you are exposed to financial risk by having to bear the cost of making good any faulty or substandard work carried out under the contract or has to meet cost overruns,

(k) you are not entitled to overtime pay, sick pay or holiday pay,

(l) you are not entitled to receive payment by way of expenses such as subsistence, travel, country money, costs of moving from site to site etc.

If you are a self-employed in one job you are not necessarily self-employed in the next job: Tax Briefing 33.

These principles are derived from the report of the Employment Status Group: Tax Briefing 43.

The following were held to be independent contractors providing their own services:

(a) A local manager for the Department of Social Welfare who was contractually obliged to provide his own premises and staff: O’Coindealbháin v Mooney, 3 ITR 45.

(b) A insurance agent whose activities were not directly controlled by the company for which he acted: MacDermott v Loy, HC 29 July 1982.

(c) Fishing crewmen (“share fishermen”) entitled to share the catch proceeds jointly: McLoughlin v Director of Public Prosecutions, 3 ITR 387. See also Minister for Social Welfare v Griffiths, (1992) 4 ITR 378; Tax Briefing 47.

(d) An independent contractor who delivered newspapers on behalf of a newspaper distributor: McAuliffe v Minister for Social Welfare, [1995] 1IR 238.

(e) A barrister’s clerk working for each member of chambers for a percentage of gross earnings: McMenamin v Diggles, [1991] STC 419.

(f) A video and television technician: Barnett v Brabyn, [1996] STC 716.

Contract staff supplied by a bureau are regarded as employed by the employment bureau, not the company using the bureau’s service: Minister for Labour v PMPA Insurance Company Ltd, 3 ITR 505. As regards agency workers, Tax Briefing 31, April 1998.

Individuals described as ‘locums’ engaged in the fields of medicine, health care and pharmacy: Tax Briefing Issue 82 – 2009

Use of ‘expression of doubt’: eBrief 05/10

Is income from a public office or employment taxed under Schedule E?

(2) A public office or employment means employment by the State, any Church body, any company or society, any public institution, corporation or local authority.

Income from a public office or employment is taxed under Schedule E.

A company director holds a public office: McMillan v Guest, 24 TC 190.

What is Schedule F?

(1) Schedule F is the heading under which distributions receive from an Irish companies are taxed.

Distribution is widely defined to include not only dividends but also any method by which a company’s profits are paid to its shareholders (section 130).

A distribution also includes a scrip dividend, i.e., additional shares issued by an Irish resident quoted company which are taxed in the hands of the recipient on the basis of the shares’ cash value (section 816(2)(b)).

You are chargeable to tax on the gross distribution before withholding tax.

Can Schedule F distributions be taxed under any other heading?

(2) A distribution chargeable under Schedule F cannot be charged under any other Schedule.

What is the rate of corporation tax?

(1) The standard rate of corporation tax is 12.5%.

What tax rate applies to profits from a qualifying shipping activity?

(1A) A qualifying shipping trade is where an Irish-owned, Irish-registered, self-propelled ship with gross tonnage of 100 tons or more (a qualifying ship) is used for qualifying shipping activities, i.e., as a ferry, liner, fishing factory ship or for transporting people or supplies to an offshore exploration platform.

Profits from a qualifying shipping trade are taxed at 12.5%.

Are companies liable to income tax?

(2) Ann Irish resident company is not liable to income tax on its profits but may be liable to deduct income tax from charges.

A non-resident company is not liable to income tax on Irish income if such income is chargeable to corporation tax.

Are companies liable to capital gains tax?

(3) Company capital gains are chargeable to corporation tax, not capital gains tax. The exception to this rule is development land gains, which are chargeable to capital gains tax (section 649).

What profits are taxed at the higher rate of corporation tax?

(1) The following profits are taxed at the higher rate of corporation tax:

(a) Case III income (untaxed interest and income from foreign property).

(b) Case IV income (miscellaneous income not taxed under any other heading).

(c) Case V income (rental income).

(d) Income from an excepted trade, i.e., a trade consisting one or more of the following excepted operations:

(i) Dealing in or developing land.

This does not include construction operations, i.e., construction type work, including installation of plumbing, electricity, gas, air-conditioning etc, cleaning of buildings, site clearance work, and haulage of building materials and equipment.

Neither does it include dealing or developing in “fully developed” land (qualifying land), i.e., land which at the time of the development, was not expected be further developed, apart from non-material development, within the following 20 years.

Non-material development means an exempt development, i.e., a development which due to its minor impact is exempt from planning law. A non-material development also includes a development which, although not exempt, increases the property’s total floor area by not more than 120%.

(ii) Mining activities (working of minerals).

(iii) Petroleum activities.

In this regard, petroleum activities means:

(a) petroleum exploration activities, i.e., searching for petroleum in a licensed area, testing, appraising and winning access to deposits found, under a licence other than a petroleum lease),

(b) petroleum extraction activities, i.e., activities in:

(i) winning petroleum from a relevant field,

(ii) transporting the petroleum to dry land,

(iii) initial treatment and storage of that petroleum (before it is refined),

(c) acquisition or exploitation of petroleum rights, i.e., the rights to reserves, including an interest in a licence.

What if a trade consists partly of excepted operations?

(2) If a trade consists partly of excepted operations and partly of other activities they are treated as two separate trades. The sales and expenses of the combined trade must be apportioned justly and reasonably between the two separate trades

What is the higher rate of corporation tax?

(3) The higher rate of corporation tax is 25%.

Income from an excepted trade means income from that trade, net of the part of the company’s charges which relate to that trade.

Does the higher rate of corporation tax apply to life business?

(4) The higher rate does not apply to income from non-life insurance, reinsurance, and from life business (provided the income in question is attributed to the company’s shareholders).

What rate applies to foreign dividends derived from trading profits?

(1) A company is taxed at 12.5% (previously 25%) on foreign dividends paid from trading profits, i.e., the aggregate of

(i) profits from carrying on the trade, and

(ii) dividends received which are treated as trading profits.

Profits means:

(a) Where the accounts must be laid before the AGM, the after-tax profit shown in the profit and loss account,

(b) In any other case, the after-tax profit shown in the profits and loss account for the territory in which the company is incorporated, prepared in accordance with generally accepted accounting principles.

In general, for the 12.5% rate to apply, the dividend paying company must be resident in a relevant territorythroughout the period out of the profits of which the dividend was paid.

However, the 12.5% rate also applies to dividends received by a quoted company from trading profits of a subsidiary in a non-treaty country. Foreign dividends received by a portfolio investor company (one having a holding of less than 5%) are exempt if the dividend forms part of the company’s trading income.

A relevant territory means an EU State, a non-EU State with which Ireland has a tax treaty, a territory for which a treaty has not yet come into effect, and a territory that has ratified the Convention on Mutual Assistance in Tax Matters.

The period out of the profits of which a dividend is paid means the period in question, or failing that the period in which the profits arose, or failing that, the last period for which accounts were made up and which ended before the dividend became payable.

In determining the period out of the profits of which a dividend is paid, if the dividend exceeds the profits available for distribution, the excess is treated as paid out of the preceding period’s profits and so on, as necessary.

A company is not treated as owning 75% of another company’s shares unless that first company is entitled to 75% of the profits available for distribution and 75% of the assets in the event of the company being wound up.

Can a dividend paid from non-trading profits qualify as paid from trading profits?

(2) In general, a dividend paid by a company that has trading and non-trading profits is regarded as paid from trading profits in the same proportion as trading profits bear to total profits.

A dividend paid from profits other than trading profits qualifies as paid from trading profits if-

(a) 75% or more of the paying company’s profits are trading profits, or derived from trading profits arising in an EU State or treaty country (relevant territory),

(b) 75% or more of the assets of the receiving company, on a consolidated basis, consist of trading assets.

When does the 12.5% rate apply to foreign dividends?

(3) This rule applies to foreign dividends (taxed under Schedule D Case III) paid from another company’s trading profits.

Is a portfolio investor entitled to the 12.5% rate on foreign trading dividends?

(4) Where a company owns less than 5% of the paying company (i.e., is a portfolio investor), the 12.5% applies to the dividend income.

Foreign dividends received by a portfolio investor company (one having a holding of less than 5%) are exempt if the dividend forms part of the company’s trading income.

Does the higher rate apply to foreign dividends paid from trading profits?

(5) Dividends of a foreign trading company are not taxed at 25% to the extent that they are taxed at 12.5%.

Must the 12.5% rate on foreign dividends be claimed?

(6) To obtain the benefit of the 12.5% rate on dividends from foreign trading profits, you must claim the relief on your self-assessment corporate tax return.

When is an SE/SCE tax resident in Ireland?

(1) Council Regulation (EC) 2157/2001 of 8 October 2001 provides for the formation of a European public limited liability company known as a Societas Europaea (SE).

Council Regulation (EC) 1435/2003 provides for the formation of a European Cooperative Society (SCE).

An SE/SCE is treated as tax resident in the Republic of Ireland (ROI) if its registered office is located there.

When does an SE/SCE cease to be tax resident in Ireland?

(2) An SE/SCE does not cease to be resident in the ROI for tax purposes as a result of relocating its registered office elsewhere.

An SE/SCE ceases to be Irish tax-resident when it changes the its place of central management and control.

Must a company deduct income tax from annual payments?

(1) A company must deduct income tax from annual payments it makes, even if the recipient is not chargeable to income tax in respect of the payment.

Does a company get credit for income tax deducted from payments it receives?

(2) A company can take credit for the income tax deducted from payments received against its corporation tax liability for the accounting period in which the payment arises.

If the income tax exceeds the corporation tax, the excess is refundable. However, no repayment is made until the corporation tax assessment is finalised.

This accounting period in which the income “arises” (section 26(3)) is normally that in which it is received (See IRC v Whitworth Park Coal Co Ltd, (in liquidation), (1957) 38 TC 531. The set-off is made against the total corporation tax for the accounting period, and not only against the corporation tax attributable to the payment.

Inspector Manual 2.2.5.

Must a company pay tax on payments received in trust?

(3) A company is treated as receiving payments received by another person on its behalf.

A company is treated as not having received payments which it receives on behalf of another person.

When is a foreign company liable to Irish tax?

(1) A foreign company is not chargeable to corporation tax unless it trades through a branch or agency in Ireland.

Where is a company resident?

A company is resident where it is centrally managed and controlled: Calcutta Jute Mills Co Ltd v Nicholson, (1876) 1 TC 83, Imperial Continental Gas Association v Nicholson, (1877) 1 TC 138 and not necessarily:

(a) where the head office is located or the shareholders’ general meetings are held: De Beers Consolidated Mines Ltd v Howe, (1906) 5 TC 198,

(b) where it is incorporated: Todd v Egyptian Delta Land and Investment Co Ltd, (1928) 14 TC 119.

A foreign registered company can be Irish resident if centrally managed and controlled in Ireland: New Zealand Shipping Co Ltd v Stephens, (1907) 5 TC 553; Bullock v The Unit Construction Co Ltd, (1959) 38 TC 712).

An Irish company which is centrally managed and controlled abroad is foreign resident: Cunard Steamship Co Ltd v Revenue Commissioners, 1 ITR 330. In that case, although the Cunard line boarded passengers from an Irish stop off point, the company was held to be non-resident as the arrangements and payments were made abroad. See also:Eccott v Aramayo Francke Mines Ltd, (1925) 9 TC 445; Egyptian Hotels Ltd v Mitchell, (1915) 6 TC 543; Noble (BW) Ltd v Mitchell, (1926) 11 TC 372; American Thread Co v Joyce, (1913) 6 TC 163.

A company may be resident in more than one country: Swedish Central Railway Co Ltd v Thompson, (1925) 9 TC 342;John Hood and Co Ltd v Magee, (1918) 7 TC 327; Union Corp Ltd v IRC, (1953) 34 TC 207.

What is included in the profits of a foreign company’s Irish branch?

(2) A foreign company is chargeable to corporation tax on income and chargeable gains of its Irish branch. It is not chargeable in respect of gains arising from disposal of assets that were not used by the Irish branch.

In Murphy v Dataproducts Ltd, (1988) 4 ITR 12, the Irish branch of a Dutch company was held not liable on earnings obtained from an investment fund held by the parent in Switzerland, as the branch had no control or access to the fund.

Can a foreign company claim a refund of income tax deducted at source?

(3) A foreign company can take credit for income tax deducted at source against its corporation tax charge. The company is not entitled to a refund until the corporation tax assessment for the accounting period has been finalised.

What profits are subject to corporation tax?

(1) An Irish resident company is chargeable to corporation tax on its worldwide profits (section 4(1)).

Are profits held in trust subject to corporation tax?

(2) A company is chargeable to corporation tax on:

(a) profits accruing for its benefit under a trust or partnership, and

(b) profits arising on its winding up.

It is not chargeable on profits received by as trustee.

What rate applies if an accounting period straddles two financial years?

(3) Corporation tax is charged for a financial year, which may not coincide with a company’s accounting period. Where an accounting period straddles two financial years, the profit is apportioned and charged at the appropriate rates.

This subsection has not applied since 2003, when the corporation tax rate reduced from 16% (2002) to 12.5% (2003).

What is the basis period for corporation tax?

(1) A company is chargeable to corporation tax on the full amount of its profits arising in an its accounting period, whether or not such profits are received in Ireland. In calculating such profits, the company may deduct expenditure authorised by tax law.

When does an accounting period begin?

(2) A company’s first accounting period begins when it first comes within the charge to corporation tax or, if the company is not ROI resident, when it first acquires an ROI source of income.

Once within the charge to corporation tax, an accounting period begins when the previous accounting period ends.

When does an accounting period end?

(3) An accounting period ends when the first of the following occurs:

(a) 12 months have passed since the beginning of the accounting period,

(b) an accounting date occurs,

(c)(i) the company begins or ceases to trade,

(ii) the company begins or ceases to be chargeable to corporation tax in respect of a trade or, if it carries on more than one trade, begins or ceases to be so chargeable in respect of all of them,

(d) the company begins or ceases to be resident in the ROI,

(e) the company ceases to be chargeable to corporation tax.

When does a company come within the charge to tax?

(4) An ROI resident company comes within the charge to tax once it starts to carry on business.

Can Revenue choose the accounting date?

(5) If a company carries on several trades with different accounting dates, and does not make up a general set of accounts for all of its activities, Revenue may decide the accounting date.

What happens if a gain arises outside an accounting period?

(6) If a gain or loss arises outside an accounting period, a new accounting period is deemed to begin, and the gain or loss accrues in that period.

Does an accounting period end when a company is wound up?

(7) A company begins to be wound up when it passes a resolution for the winding up or a winding up petition has been presented and the company is ordered to be wound up on foot of that petition.

Once the company begins to be wound up, the previous accounting period ends, and a new accounting period begins. That new accounting period only ends when the company has completed being wound up or 12 months have expired, whichever is earlier.

Can Revenue choose the accounting period?

(8) If it is not possible to determine the accounting period (for example, because there are no accounts), the inspector may make an assessment for a 12 month period. That period is considered to be an accounting period unless the inspector revises it or the company reveals the true accounting period. The inspector’s assessment is then treated as an assessment for the true accounting period.

The inspector retains the right to make further assessments for periods other than the true accounting period.

What is capital gains tax?

(1) Capital gains tax (CGT) is charged on capital gains, i.e., when a person makes a chargeable gain on a disposal of an asset.

For an Irish resident, assets means means worldwide assets: Turner v Follett, [1973] STC 148.

What is the basis period for CGT?

(2) CGT is assessed on chargeable gains accruing to a person in a tax year.

What is the CGT rate?

(3) The general rate of CGT is 33% (effective 6 December 2012).

A 40% rate applies to gains on disposal of foreign life assurance policies or foreign deferred annuity contracts (section 594(2)(f)).

What are exploration rights?

(1) Exploration or exploitation rights are rights to assets generated from exploration or exploitation activities, i.e., activities relating to exploration or exploitation of the sea bed and its natural resources either within Irish territorial waters or in a designated area, i.e., a block on the Continental Shelf in which the Government has granted offshore exploration rights.

Shares includes any security, a term which itself includes a security that does not create a charge on assets. Interest paid on an unsecured loan of money is regarded as paid in respect of a security issued for the loan.

Are there special rules for certain assets?

(1A)(a) Land or minerals on which a foreign resident is liable (subsection 3) include shares that derive the greater part of their value form those assets or from exploration rights (subsection 6).

(b) If here is any arrangement with a person connected with the company whereby cash has been injected into the company before a disposal of such shares so that they will derive the greater part of their value from the cash that arrangement will be ignored if its purpose was to avoid tax.

Who is liable to CGT?

(2) An individual who is resident or ordinarily resident in the Republic of Ireland (ROI) in a tax year is chargeable to CGT on gains accruing to him in that year.

Company gains are chargeable to corporation tax except for development land gains (section 649) which are liable CGT.

Is a foreign resident liable to CGT?

(3) An individual who is neither resident nor ordinarily resident in the ROI, is chargeable to CGT on the disposal of:

(a) land in the ROI,

(b) minerals in the State or mining exploration rights,

(c) assets in the ROI that were used for a trade carried on by that person through a branch or agency in the ROI.

(d) Foreign assets held for a foreign life company which were used or held for the trade of its Irish branch.

Is a foreign domiciliary liable to Irish CGT?

(4) A foreign domiciliary is not chargeable to CGT on the disposal of assets situated outside the ROI, unless the proceeds are remitted the gains into the ROI. If remitted, the gains are treated as accruing when received in the ROI.

A foreign domiciliary cannot offet losses on foreign disposals against Irish chargeable gains.

Does a foreign loan repayment count as a remittance?

(5) If a foreign domiciliary uses the proceeds of a foreign gain to repay a foreign loan in satisfaction of an Irish debt, the proceeds are treated as remitted into the ROI.

Are there any anti-avoidance measures?

(5A) If a non-domiciled resident transfers chargeable gains to a spouse or civil partner and, on or after 24 October 2013, any amounts derived from those gains are remitted to the State the remittance will be deemed to have been made by the transferor and will be taxable in the State.

Are offshore exploration rights Irish assets?

(6) Gains accruing on the disposal of Irish exploration rights are treated as accruing on the disposal of Irish assets.

How is a foreign resident taxed on the disposal of Irish assets?

(7) If a foreign resident disposes of:

(a) minerals in the ROI,

(b) mining or exploration rights, or

(c) exploration or exploitation rights in a designated area,

the gains are treated as arising from the disposal of assets used by an Irish branch.

Can decisions as to residence and domicile be appealed?

(8) A person aggrieved by a Revenue decision as to domicile or ordinary residence may appeal to the Appeal Commissioners within two months of the decision notice.

Can I avoid CGT through temporary non-residence?

(1) This anti-avoidance rule applies where a person temporarily leaves Ireland in order to avoid CGT on the disposal of certain shares (relevant assets), the market value of which:

(a) equal or exceed 5% of the company’s issued share capital, or

(b) exceed €500,000.

The rule works by deeming you to have disposed of, and immediately reacquired, the shares on the last day of the year of departure, i.e., the last tax year in which you were Irish tax resident before going abroad for a number of years (intervening years) and then coming back (in the year of return).

If you could be taxed on a gain from disposal of relevant assets you are treated as Irish resident in the year of disposal.

When does the temporary non-residence rule apply?

(2) The anti-avoidance rule applies if you have relevant assets (see (1)) and you:

(a) are Irish resident for a tax year (the year of return) but were not resident for one or more tax years (intervening years) immediately preceding the year of return,

(b) were Irish resident and domiciled for a tax year before the year of return, and

(c) spend not more than five tax years in tax exile, i.e., there are not more than five tax years between the year of departure and the year of return.

Is a gain made while temporarily non-resident taxed?

(3) If you carry out a transaction like the one in (2), i.e., if you dispose of relevant assets while temporarily abroad you are deemed to have disposed of, and immediately reacquired, the relevant assets at their market value on the last day of the year of departure.

The gain you realise while temporarily abroad is crystallised and charged to you on the last day of the tax year in which you leave.

Is the actual value of the disposal relevant?

(3A) Yes. If the actual proceeds or market value at the date of disposal of the assets is greater or less than the market value on the last day of the year of departure that value will be substituted.

Can I claim double tax relief on gains made while temporarily non-resident?

(4) If you are caught for both Irish and foreign CGT in respect of gains made while temporarily non-resident, and there is a tax treaty (which covers CGT) between Ireland and the foreign country, you are entitled to a tax credit up to the amount of the Irish tax in respect of the foreign tax suffered.

Are gains made while temporarily non-resident disclosable on a tax return?

(5) Gains made while temporarily non-resident must be disclosed in the tax return.

What is the basis of the Schedule C charge?

(1) A paying agent is charged to Schedule C tax on behalf of the persons entitled to public revenue dividends.

How is Schedule C applied in practice?

(2) The detailed rules for assessment, charge and payment of tax under Schedule C are contained in Schedule 2.

Are securities held in the name of the Minister for Finance exempt from Schedule C?

(1) Schedule C tax is not payable on securities in the name of the Minister for Finance in the books of the Bank of Ireland, nor on any public revenue dividends paid into accounts in those books in the name of the Minister.

Are State-owned securities exempt from Schedule C?

(2) Schedule C tax is not payable on State-owned securities in the books of the Bank of Ireland.

Is a foreign resident liable to Schedule C tax?

(1) A foreign resident is entitled to be paid dividends on foreign securities gross, i.e., free of Schedule C tax.

A person absolutely entitled to foreign securities held on trust is deemed to be their owner.

Is a foreign resident entitled to a refund of Schedule C tax?

(2) A foreign resident can obtain relief from Schedule C tax by allowance or repayment.

Can a Revenue decision as to residence be appealed?

(3) A person aggrieved by a Revenue decision as to his residence status may appeal. The appeal must be made to the Appeal Commissioners in writing within two months of the decision notice.

Is interest on government securities subject to withholding tax?

(1) Interest on government securities is to be paid gross, i.e., without deduction of tax.

Deemed to be securities issued under this section:

(a) Securities issued by a body designated under section 4(1) of the Securitisation (Proceeds of Certain Mortgages) Act 1995: section 41;

(b) Securities issued by the International Bank for Reconstruction and Development: section 40(2);

(c) Securities issued by State-owned companies: section 37(3);

(d) Securities of European Bodies: section 39(2);

(e) State-guaranteed securities: section 38(2).

Is interest on government securities taxed?

(2) Interest on government securities is taxed under Schedule D Case III.

Where such securities are controlled by a court or public department, the person chargeable is the person in whose name the securities are held.

What information must a paying agent provide to Revenue?

(3) A paying agent, intermediary or nominee holder in relation to government securities must, if requested, provide Revenue with:

(a) the interest recipient’s name and address,

(b) the amount of the interest paid, and,

(c) the name of the person on whose behalf such security was bought.

Is interest on semi-State securities subject to withholding tax?

(1)-(2) Interest on listed sem-State securities may be paid gross, i.e., without deduction of tax.

Can a semi-State company deduct interest paid on securities?

(3) The security issuer may deduct interest paid in computing its corporation tax.

Securities issued by	On or after
The Electricity Supply Board	13 July 1954
Córas Iompair Éireann	13 July 1954
Bord na Móna	18 July 1957
Dublin Airport Authority	2 July 1964
Radio Telefís Éireann	24 May 1989
Bord Gáis Éireann or its gas network company	28 May 1992
Irish Water	24 October 2013

Is interest on State-guaranteed securities subject to withholding tax?

(1)-(2) In general, interest on State-guaranteed securities may be paid gross, i.e., without deduction of tax, but this rule does not apply to:

(a) securities of any of the bodies mentioned in the Table to section 37) [presumably because they are covered by that section], or

(b) securities issued by the National Development Finance Agency.

Can an issuer of State-guaranteed securities deduct interest paid?

(3) An issuer of State-guaranteed securities may deduct the interest paid in computing its corporation tax.

Is government security interest received by a non-resident taxable?

(1) The Minister for Finance may issue a security with the condition that the capital and the interest on the security is exempt from tax if the security owner is not resident in the Republic of Ireland.

Such securities are exempt from tax.

Is government security interest received by an Irish branch of a foreign bank taxable?

(2) Government security interest received by the Irish branch of a foreign (financial) company is taxable.

Is government security interest received by an Irish company taxable?

(1)-(2) Generally, only a foreign resident can receive interest on government securities without deduction of tax.

However, interest gross may be paid gross to a qualifying company:

(a) a foreign company that carries on a relevant trade through an Irish branch, or

(b) an Irish company which carries on a relevant trade, which is owned as to 90% or more by by a foreign company.

A foreign company is a non-resident company which is controlled by a person resident in a country with which Ireland has a double tax treaty (a relevant territory).

A relevant trade is one which does not consist of banking, assurance business, retail selling or dealing in securities, and is mainly carried on in the State.

This section is an exception to the rule in section 43(2).

Any company or group funds may be invested and there is no upper limit or restriction on the amount. An investor may invest through a bank or financial institution or deal directly with the National Treasury Management Agency (NTMA).

When are government bond redemption gains taxable?

(1)-(3) Since 25 January 1984, a gain on the redemption of non-interest-bearing government securities issued at a discount, including Exchequer Bills, Exchequer Notes, and Agricultural Commodities Intervention Bills is taxable.

When are government bond redemption gains exempt?

(4) Government bond redemption gains are exempt in the hands of a foreign resident.

This rule does not apply to the Irish branch of a foreign company.

Are EU bond redemption gains exempt?

(1)-(3) A gain on the redemption of the following securities is exempt:

(a) Irish government securities,

(b) securities issued by an Irish semi-State body, and guaranteed by the Minister for Finance,

(c) securities issued by the European Community, the European Atomic Energy Authority and the European investment Bank,

(d) securities issued by the World Bank.

As regards securities issued after 25 January 1984, this exemption does not apply to securities within (4).

When are bond redemption gains taxable?

(4) As regards securities issued after 25 January 1984, redemption gains on the following securities are taxable:

(a) non-interest bearing Government securities issued by the Minister for Finance at a discount,

(b) Agricultural Commodities Intervention Bills,

(c) strips of Government securities.

When are bond redemption gains exempt?

(5) A gain on the redemption of bonds within (4) is exempt in the hands of a foreign resident.

This rule does not apply to the Irish branch of a foreign company.

Can the Minister specify that a security is exempt if paid to a foreign resident?

(1)-(2) The Minister for Finance can specify that the following securities be issued subject to a condition that interest in the security is exempt in the hands of a non-resident:

(a) securities of semi-State bodies (section 37),

(b) certain State-guaranteed securities (section 38),

(c) securities of certain European bodies (section 39),

(d) securities of the World Bank (section 40),(e) securities of bodies designated under section 4(1) of the Securitisation (Proceeds of Certain Mortgages) Act 1995.

Is interest received by an Irish branch of a foreign bank taxable?

(3) Interest received by the Irish branch of a foreign (financial) company is taxable.

What is a local authority?

(1) A local authority includes any public body recognised as a local authority by the Minister for the Environment.

Is interest on local authority securities taxable?

(2) Interest on local authority securities is exempt in the hands of a foreign resident.

Local authority interest received by the Irish branch of a foreign (financial) company is taxable.

What is farm land?

Before 6 April 1974, farmers were largely exempt from income tax as their profits were based on the rateable valuation of the land, which had no relationship to the profits being generated by the farming activity. The Finance Act 1974established that farming was a trade.

Although farming was largely exempt, the profits of cattle and milk dealers were taxable. A cattle or milk dealer could not escape tax by saying he was a “farmer.”

Are profits of cattle dealers and milk dealers taxable?

(2) A cattle dealer or milk dealer who uses farm land, which is insufficient for the keeping of cattle brought onto the land, to graze your livestock is regarded as carrying on a trade. The profits of that trade (not the trade of farming) are taxed under under Schedule D Case I.

What is a strip?

(1) These rules apply to strips of security (Irish government stock and other government and corporate bonds (section 815)).

A strip is created when the right to receive the interest payment on the security is separated (“stripped”) from the right to receive the capital.

Where a security is part of a security dealer’s trading stock, opening value means the price the security would fetch if sold in the open market (its market value).

Otherwise, it means the lesser of:

(a) the security’s nominal value (the value in terms of which the interest on the security is expressed), but if the security’s value is not so expressed, the price paid for the security when it was issued, and

(b) its market value when the strip was created.

An individual strip holder is liable to an annual income tax charge (see (5)) on 31 December each year.

For a company, the charge applies on the last day of the accounting period (the relevant day).

How is the disposal of a strip taxed?

(2) The creator of a strip is deemed to have:

(a) disposed of the original security at market value,

(b) reacquired each constituent strip of the original security at its appropriate proportion of the original security’sopening value.

Each constituent strip is deemed to be a non-interest bearing security.

Profits or gains on its disposal are chargeable under Schedule D Case III (unless your profits are part of a security dealing trade and taxed under Schedule D Case I).

What is the acquisition cost of a strip?

(3) A strip’s acquisition cost is the lesser of:

(a) the price paid, and

(b) the strip’s proportion of the security’s nominal value (i.e., the proportion which the strip’s value would have borne to the aggregate market value of all the strips if they were created on the day the security was issued).

What if strips are reconstituted into the original security?

(4) The reconstitution of a series of strips into the original security is treated as a disposal of each constituent strip at market value.

The reconstitution also deems the original security to have been acquired at a price equal to the combined market value of the constituent strips.

Is there an annual charge on holding a strip?

(5) The holder of a strip is deemed to have disposed of, and immediately reacquired, the strip at market value on 31 December each year (the relevant day). This is to ensure the holder is taxed on the annual appreciation.

What if the annual deemed disposal gives rise to a loss?

(6) A loss produced by the annual deemed disposal and reacquisition of a stript may be offset against other Schedule D Case III income.

How are profits of quarries, mines etc taxed?

(1) Schedule D Case I(b) charges to tax the profits of quarries, mines, canals, docks, rights of markets, tolls, railways, bridges and ferries (section 18(2)).

Who is assessable in relation to profits from quarries, mines etc?

(2) The person assessed under Schedule D Case I is:

(a) the person who operates the quarry, mine etc,

(b) the agent/officer responsible for directing or managing it, or

(c) the agent/officer who receives the profits of the concern.

How are mining adventurers taxed?

(3) Each member of a company of mining adventurers is separately assessed and charged to tax in respect of his share of the profits.

A person engaged in several ventures may, by agreement with the inspector, offset a loss incurred in one venture against the profits of another.

Each member is chargeable to tax in the tax district where his profits are greatest.

Is income from a foreign employment taxed?

(1) Income from a foreign employment (i.e., where the duties are exercised outside the Republic of Ireland) is taxed under Schedule D Case III as income from a foreign possession.

But see section 821, which allows foreign employment income of an individual who is ordinarily resident, but not resident, in Ireland to escape tax.

Is benefit in kind from a foreign employment taxed?

(2)-(3) Benefit in kind arising from a foreign employment is taxed as if the employment was Irish.

Are illegal earnings taxed?

(1) Profits from illegal activities, for example, dealing in drugs or prostitution, are chargeable to tax under Schedule D Case IV.

Before 8 June 1983, illegal earnings could not be assessed to tax: Hayes v Duggan, 1 ITR 195, Collins and others v Mulvey, 2 ITR 291.

The UK courts have held that profits from prostitution are chargeable to tax: IRC v Aken, [1990] STC 497. Profits from buying and selling “one arm bandits” (then illegal) were held chargeable in Mann v Nash, (1932) 16 TC 523. See alsoSouthern v A-B, (1933) 18 TC 59; Canadian Minister of Finance v Smith, (1926) 5 ATC 621; Lindsay Woodward and Hiscox v IRC, (1932) 18 TC 43.

How does the Criminal Assets Bureau assess tax?

(2) Where the Criminal Assets Bureau (CAB – the body) have identified suspected criminal assets and taken action to recover those assets, they may assess illegal earnings under Schedule D Case IV.

The assessment may be issued in the name of the CAB, and the Appeal Commissioners cannot discharge the assessment on the basis that the income arose from an unknown or illegal source.

The CAB may also demand payment of the assessed tax. If the tax is paid, it must issue a receipt, lodge the payment to the Revenue bank account, and provide the Collector-General with details of the assessment and any payment made.

Must income received under deduction of tax be declared on a tax return?

Where income is received under deduction of tax (under sections 237 or 238, Schedule C, Schedule D), the gross income (the relevant income) must be declared in the tax return under Schedule D Case IV.

The recipient is entitled to a tax credit for the tax deducted at source.

Must a dividend paying agent deduct encashment tax?

(1) An Irish:

(a) banker who obtains payment of foreign dividends,

(b) banker who sells or realises coupons for foreign dividends,

(c) dealer in coupons who buys foreign dividend coupons,

must deduct “encashment tax” from the dividends, the realisation proceeds, or the purchase price, as the case may be.

This Schedule D tax is collected under the Schedule C collection rules (Schedule 2).

When is encashment tax not deductible?

(2) Encashment tax does not apply to the clearing of a cheque.

Is a foreign resident subject to dividend encashment tax?

(1) A foreign resident is exempt from dividend encashment tax and is not entitled to any allowance or credit against such income.

A foreign resident who is the sole beneficiary of a trust with power to call on the trustees to transfer the foreign securities to him, is deemed to own such securities and is also exempt from encashment tax.

How does a foreign resident reclaim encashment tax?

(2) A foreign resident can reclaim encashment tax by making a claim to Revenue.

Can a Revenue decision as to residence be appealed?

(3) If aggrieved by a Revenue decision as to residence, you can appeal to the Appeal Commissioners within two months of Revenue decision notice.

Must a paying agent deduct tax from Eurobond interest?

(1) Eurobonds are long-term, interest paying securities issued by companies and other institutions.

In the case of registered Eurobonds, the security owner is registered and identifiable.

In the case of bearer Eurobonds, the owner is the bearer of the security.

A paying agent, banker or coupon dealer (a relevant person) who pays interest on bearer Eurobonds that are quoted on a recognised stock exchange (quoted Eurobonds) must, unless authorised by Revenue to pay gross (section 246), deduct standard rate tax.

In general, Revenue would not give such authorisation for bearer securities as it would not be possible to determine who the holder was, or whether the bearer was resident in the Republic of Ireland.

This section allows interest on bearer Eurobonds to be paid gross.

What is a recognised clearing system?

(1A) Financial institutions participate in clearing systems in order to minimise the paperwork associated with transfer of ownership of the securities. A member of the system can electronically transfer ownership so that the latest participant owner’s name is always immediately available.

Revenue may by order designate one or more security-clearing system as a recognised clearing system and include any other security-clearing system which Revenue have designated as a recognised clearing system.

(a) the person by or through whom the payment is made is not resident in Republic of Ireland, or

(b) the Eurobonds are held in a recognised clearing system (for example Euroclear, Cedel), or the recipient completes a non-residence declaration.

Must a paying agent file a return?

(3) a paying agent of Eurobond interest must, within 12 months of paying the interest, send to the appropriate officera return of gross payments made into a recognised clearing system, and to non-residents.

(6)-(7) The declaration to be completed by a foreign resident who wishes to receive Eurobond interest gross, must state the payee’s name, address, country of residence.

The payee must also undertake to notify the interest payer if he becomes Irish resident.

(8) Non-residence declarations should be kept for the longer of:

(a) six years,

(b) three years after the latest interest payment date.

A paying agent must also make such declarations available for inspection by Revenue.

The inspector may examine or make copies of the declarations.

What is the strict basis of assessment for Case I/II income?

(1) A trader or professional person is liable to tax on the “full amount” of profits earned in the tax year. This strict or “actual” basis of assessment ensures that the basis period is the tax year.

(2) Usually, the profits of a trader or professional person are based for tax purposes on:

(a) the profits of the accounts year ending in the tax year,

(b) if there several set of accounts with different end dates, the profits to the year ending on the latest of those dates.

If there are no accounts, the profits are taken to be the actual profits for the tax year (see (1)).

What is the basis of assessment for Case I/II income in the first year of trading?

(1) These rules are referred to as the commencement rules.

The basis of assessment for the first tax year of trading is the actual profits for that year.

The commencement date depends on the particular facts and circumstances. In Birmingham and District Cattle By-Products Ltd v IRC, (1928) 12 TC 92, the company was held to have commenced trading when it began to process raw materials it had bought. In Todd v Jones Bros Ltd, (1930) 15 TC 396, the company was held to have commenced trading on the date of the contract transferring the business. In Angel v Hollingworth, (1956) 37 TC 714, the company was held to have commenced trading at the time the partnership business was transferred to it (i.e., not the contract date).

If you acquire a second shop you are continuing your existing trade (not commencing a new trade): Maidment v Kibby and another, [1993] STC 494.

Commencing a new activity usually means you have commenced a new trade. In O’ Loan v Noone and Co, 2 ITR 146, a company that changed its activity from fruit to coal merchants was regarded as having commenced a new trade. New trades were also found in Farrell v Sunderland Steamship Co Ltd, (1903) 4 TC 605; Fullwood Foundry Co Ltd v IRC, (1924) 9 TC 101; H and G Kinemas Ltd v Cook, (1933) 18 TC 116, Gordon and Blair Ltd v IRC, (1962) 40 TC 358, andSeaman v Tucketts Ltd, (1963) 41 TC 422.

Extensions to existing trades were found in Howden Boiler and Armaments Co Ltd v Stewart, (1924) 9 TC 205; Cannop Coal Co Ltd v IRC, (1918) 12 TC 31; IRC v Turnbull Scott and Co, (1924) 12 TC 749 and Cannon Industries Ltd v Edwards, (1965) 42 TC 625. In Seldon v Croom-Johnson, (1932) 16 TC 740, a barrister becoming Queen’s Counsel was held not to have commenced a new profession.

In Edmunds v Coleman, [1997] STC 1406, a freelance television producer who changed from part-time to full-time producer was held not to have commenced a new activity; he was merely intensifying his existing activities.

Becoming resident is not of itself the commencement of a trade: Fry v Burma Corporation Ltd, (1930) 15 TC 113.

Where two businesses merge, there is technically a new business: Humphries (George) and Co v Cook, (1934) 19 TC 121.

(a) the profits of the only accounts year ending in that tax year,

(b) if there are several account end dates, the last 12 months of the latest accounts period ending in that year,

(c) If no accounts have been made up, the actual profits for that year.

(3) The basis of assessment for the third tax year of trading is the profits of the latest 12 month accounting period ending in that year (section 65(2)).

If the profits for the second tax year exceed the actual profits for that second year, the excess may be deducted from the profits for the third tax year.

This relief, which is treated as a trading loss (section 382), must be claimed when filing the return for the third tax year.

What is the basis of assessment for Case I/II income in the final year of trading?

(1) These rules are referred to as the cessation rules.

The basis of assessment for the final tax year of trading is the actual profits for that year.

If the actual profits for the penultimate tax year exceed the profits originally charged, an additional assessment is made to charge the excess.

Tax owed by a deceased trader is assessed on the executors or administrators, and is a debt due from his estate.

Whether a trade has ceased depends on the particular facts. In O’Kane and Co v IRC, (1922) 12 TC 303, the company was held to be still trading after it had allegedly sold off all stock in a “retirement from business” sale. See also Hillerns and Fowler v Murray, (1932) 17 TC 77; Southern v Cohen’s Executors, (1940) 23 TC 566; Parker v Batty, (1941) 23 TC 739; Sethia v John, (1947) 28 TC 153; IRC v Daniel Beattie and Co, (1955) 36 TC 379, and Aeraspray Associated Ltd v Woods, (1964) 42 TC 207.

A break in trading is not necessarily a cessation: Merchiston Steamship Co Ltd v Turner, (1910) 5 TC 520; Sutherland v IRC, (1918) 12 TC 63; Kirk and Randall Ltd v Dunn, (1924) 8 TC 663; Robroyston Brickworks Ltd v IRC, [1976] STC 329; Boland’s Ltd v Davis, 1 ITR 86.

A change of ownership of a business is not a permanent cessation: Cronin v Lunham Bros Ltd (In liquidation), 3 ITR 363.

The recovery of a bad debt by an executor is not regarded as a new trade, but a receipt of the old trade (as a debt due to the estate): CD v J M O’Sullivan, (1948) 2 ITR 140.

What is a short-lived business?

(1) A short-lived business is one that permanently ceases in its third tax year.

In such a case, the interaction of the commencement (section 66) and cessation (section 67) rules may result in excess profits being assessed.

(2) The owner of a short-lived business can write to the inspector on or before 31 October after the final tax year to have the assessment for the penultimate year revised to actual.

(3) Short-lived business relief also applies where the trade as ceased as a result of the trader’s death.

Does a change of ownership give rise to a cessation and commencement?

(1)-(2) A successor to a trade or profession previously carried on by another person (the predecessor) is treated as having commenced a new trade and the predecessor is treated as having ceased the old trade.

In other words, a change of ownership results in a cessation and commencement for tax purposes.

(4) Tax owed by a deceased person is assessed on his executors or administrators and is a debt due and payable from his estate.

What is the Case III single source rule?

(1) Case III income (untaxed interest and income from foreign property) is deemed to issue from a single source.

This “single source rule” makes it unnecessary to apply commencement rules each time a new source is obtained (or cessation rules each time a source ceases).

(1A) This subsection was inserted to clarify that foreign rental losses cannot be offset against other income taxable under Case III of Schedule D.

(2) Case III income is based on the full amount of profits arising in the tax year. This is referred to as the arising basisor actual basis.

(3) In computing Case III income, the only deductions allowed are those mentioned in section 71.

(4) Where the remittance basis (section 71(3)) applies, the basis of assessment for Case III income is the full amount of income received in the Republic of Ireland in the tax year.

Whether remittance has in fact occurred: Scottish Provident Institution v Allan, (1903) 4 TC 591.

A remittance includes a constructive remittance: Back v Whitlock, (1932) 16 TC 723), for example, a loan enjoyed in the UK: Harmel v Wright, (1973) 49 TC 149. In Thomson v Moyse, (1960) 39 TC 291, a cheque drawn on a United States bank account was held to be a constructive remittance to the UK when sold to a UK bank.

But not a remittance of capital: Timbrell v Lord Aldenham’s Executor, (1947) 28 TC 293, Kneen v Martin, (1934) 19 TC 33, unless bought out of foreign income while the taxpayer was resident in the UK: Walsh v Randall, (1940) 23 TC 55.

A constructive remittance does not include minor purchases by the spouse of a non-domiciled individual which do not accrue to the benefit of the non-domiciled individual: Carter v Sharon, (1936) 20 TC 229.

Unremittable income (section 1004) or gains (section 1005) are not taxed: Fellowes-Gordon v IRC, (1935) 19 TC 683.

Remittances are taxed whether intended or not: Roxburghe’s (Duke of) Executors v IRC, (1936) 20 TC 711, O’Sullivan v O’Connor, (1947) 26 ATC 463.

Remittances after the source had ceased but within the same tax year are taxed: Joffe v Thain, (1955) 36 TC 199.

What is the basis of assessment for Case III foreign source income?

(1) Case III foreign source income is based on the full amount of profits arising in the tax year, subject to deductions for:

(a) the equivalent deductions that would haven been available in respect of equivalent Irish-source income.

(b) foreign tax paid on the foreign income, and

(c) any annual payment (other than annual interest) payable from the foreign source income to a foreign resident.

(2) The arising basis does not apply to a foreign domiciled person.

(3) Case III foreign source income of a foreign domiciled person is based on the actual sums received in the Republic of Ireland in the tax year. This is referred to as the remittance basis.

Domicile

Your domicile of origin is the domicile of your father at the time of your birth. While you are a minor child, your domicile follows any change in your father’s domicile.

You acquire a domicile of choice by intending to make your permanent home in a different country to the country of your domicile of origin, and actually living in the new country: IRC v Duchess of Portland, [1982] STC 149, Plummer v IRC, [1987] STC 698.

Domicile of choice is a matter of fact: Re Sillar, [1956] IR 350, and of intention: Earl of Iveagh v Revenue Commissioners, 1 ITC 316, [1930] IR 431. In that case, and in Captain Prior-Wandesforde v Revenue Commissioners, 1 ITC 248, an Irish-born taxpayer was held to have retained his Irish domicile of origin (and could not claim a UK domicile of choice).

It is difficult to abandon your domicile of origin: IRC v Cohen, (1937) 21 TC 301. Considered on its own, the length of time spent in the new country does not establish domicile there: In Winans v A-G, (1904) AC 287 and Bowie (or Ramsey) v Liverpool Royal Infirmary, (1930) AC 588, residence in another country for almost 40 years did not change a domicile of origin. In Revenue Commissioners v Shaw, HC, 20 April 1977, the deceased who had property in Ireland and Scotland and had made a will according to Scottish law was held to have died domiciled in Ireland. It is up to you to show that you are not domiciled in the Republic of Ireland: Proes (Claire) v Revenue Commissioners, unreported, HC, 5 June 1997.

If have obtained a foreign domicile of choice, a return to live in your country of origin restores your domicile of origin:Fielden v IRC, (1965) 42 TC 501, Re Rowan (deceased), [1988] ILRM 65.

A foreign domicile of origin is not generally changed by the mere fact of residence in Ireland: Buswell v IRC, [1974] STC 266 and IRC v Bullock, [1976] STC 409. But was held to have changed in Steiner v IRC, [1973] STC 547, ReLawton, (1958) 37 ATC 216, and Re Furse (dec’d) Furse v IRC, [1980] STC 596.

A married woman’s domicile of dependence did not automatically revert to her origin, even on her husband’s death: Re Wallach dec’d, Weinschenk v Treasury Solicitor, (1949) 28 ATC 486, IRC v Duchess of Portland, [1982] STC 149.

Tax planning with the remittance basis

If entitled to the remittance basis, you should make remittances out of capital. You should pay foreign income into a separate account with a different bank. A remittance of the original capital is not taxed.

If you make a foreign gain, you should pay the disposal proceeds into a separate bank account and not remit to Ireland unless necessary.

(3A) If a recipient of foreign income gets a payment from the foreign government in respect of tax paid by another person, Irish tax is payable on the “gross” payment, including the tax “credit”.

Are there anti-avoidance rules in relation to the remittance basis?

(1) This anti-avoidance section counteracts schemes whereby a person on the remittance basis (section 71) might avoid tax by substituting borrowed funds for a remittance. This is sometimes referred to as a constructive remittance.

It defines a lender to include not just a banker, but any person entitled to repayment of money lent.

It also ensures that the creation of a new debt or a series of debts (where one debt is incurred to satisfy another) in order to repay a different debt is caught. Money applied towards repaying the new debt is regarded as having been applied towards repaying the old debt.

In the following text, Ireland means the Republic of Ireland.

Does foreign satisfaction of an Irish debt count as a remittance?

(2) A person is treated as having remitted:

(a) foreign source income applied outside Ireland to pay off a debt incurred in Ireland,

(b) foreign source income applied outside Ireland to pay off a foreign loan, the proceeds of which have been brought into Ireland,

(c) any debt incurred in satisfying the debt in (a) or (b).

What is the basis of assessment for Case IV income?

(1) Case IV income is based on the full amount of profits arising in the tax year.

What must be disclosed in relation to Case IV income?

(2) The nature (source) of Case IV profits must be disclosed on the tax return.

(3) The disclosure must contain a statement that it is made to the best of knowledge and belief of the taxpayer.

What is Case V income?

(1) Case V income is income from (Irish-source) rents and easements (rights of way).

It does not include income from quarries, mines, etc (section 104).

Foreign-source rental income is taxed under Case III (section 70).

What is the Case V single source rule?

(1) Case V income is deemed to issue from a single source.

This “single source rule” makes it unnecessary to apply commencement rules each time a new source is obtained (or cessation rules each time a source ceases).

What is the basis of assessment for Case V income?

(3) Case V income is based on the full amount of profits arising in the tax year.

The charge applies to rental profits “arising” in the tax year – whether payable in advance or arrears: Strick v Longsdon, (1953) 34 TC 528

See section 101 which provides relief where rent is paid in arrears.

Is rent received under a favoured letting taxable?

(4) A favoured letting arises where the rent under a lease is insufficient, taking one year with another, to cover normal letting costs and landlord’s obligations (for example, maintenance, repairs and insurance).

Rent received under a favoured letting is not taxed, the expenses are not deductible (section 97), any resulting loss is not allowable (section 384).

Does work done by the tenant count as rent?

(5) Rent includes any payment in the nature of rent (for example, work done by a tenant on the leased premises).

Do IT principles apply for CT?

(1) Corporation tax (CT) is computed in accordance with income tax (IT) principles. See also Inspector Manual 4.5.3.

(a) Its total income under Schedules C, D (Cases I-V), and E. Distributions from Irish resident companies (Schedule F) are not counted in arriving at total income (section 129).

(b) Its chargeable gains.

Are company profits charged on a basis period?

(4) The profits of a sole trader are charged on the basis of an accounts year ending in the tax year. This is not the case with CT. Company profits are charged on the basis of the accounting period (section 27(1)).

Are dividends deductible in a CT computation?

(5) The following are not deductible for CT purposes:

(a) dividends paid – these are a distribution out of profits, not an expense of earning profits, or

(b) annual payments (including patent royalties and rental type payments for quarries, mines, etc) – these are allowed against total income (section 243) rather than just against trading income – see also Inspector Manual 4.5.4.

Do IT exemptions apply for CT?

(6) In general, IT exemptions and charges apply for CT – whether or not the matter being charged is expressed as income.

Can companies claim the remittance basis?

(7) The remittance basis (section 71(3)) does not apply to companies.

Can a transaction have distinct IT and CT consequences?

(8) The operation of IT and CT is not affected by the fact that the same transaction has an IT consequence for an individual and a CT consequence for your company.

Must accounting standards be used in computing profits?

(1) A company’s trading and professional profits computed must be computed using generally accepted accounting principles (GAAP), before being adjusted in accordance with tax law and case law.

What are the tax consequences of switching from GAAP to IFRS?

(2) Schedule 17A sets out transitional arrangements to deal with situations where your company switches to International Financial Reporting Standards (IFRS), i.e., where the profits of the current period are computed using IFRS and the profits of the previous period were not.

Should changes in the fair value of financial assets be recorded?

(1) Under IFRS, movements in the value of financial assets and financial liabilities must be put through the company’s profit and loss account because income/gains arising in a period are determined in relation to the fair valueof such assets at the balance sheet date.

Should changes in the fair value of assets be reflected in taxable profits?

(2) If unrealised gains and losses (see (1)) are included in a company’s accounts in accordance with IFRS, such gains and losses must be included when calculating its profits for tax purposes.

Can use of different standards give rise to a tax advantage?

(1) This is an anti-avoidance section. Where a company is a member of a group of companies and one member prepares its accounts under IFRS, and another under GAAP, a tax advantage could conceivably apply to either. In this regard:

(a) A tax advantage means a reduction, avoidance or deferral of a charge, or potential charge, to tax. It also means a tax refund or increase in such refund, and any potential such refund.

(b) A series of transactions is not prevented from relating to two companies merely because:

(i) there is no transaction to which both companies are party,

(ii) the parties to any arrangement in the series do not include one or both companies, or

(iii) a transaction exists in the series to which neither company is party.

How is a tax advantage derived from different accounting standards nullified?

(2) This rule applies where:

(a) A company (being subject to tax on its trading or professional income) prepares accounts under IFRS.

(b) An associate company (fellow group member) prepares accounts under Irish GAAP.

(c) There is a transaction or a series of transactions (see (1)) between the two companies.

(d) A tax advantage (see (1)) would accrue to the first company as compared with its situation under Irish GAAP.

In such a case, the tax advantage is nullified by treating the company’s pre-tax profits as being its profits computed under Irish GAAP. In other words Irish GAAP is used as the starting point for both companies.

What is a finance lease?

(1) A finance lease is a lease that is treated as such under generally accepted accounting practice (GAAP).

How is income under a finance lease computed for tax purposes?

(2) Where a company carries on a leasing trade, its income from a finance lease is not the income as computed under GAAP.

Instead, the income is to be computed by treating lease payments receivable as trading receipts, and by treating expenses incurred in earning the lease payments as trading expenses.

Do IT computation rules apply for CT?

(1) The IT computation rules apply for CT purposes, subject to the additional rules in (2)-(7).

Do IT cessation rules apply for CT?

(2) A company that begins (or ceases) to carry on a trade is treated as if it had commenced (or discontinued) the trade at that point.

The IT rules which allow the trade to be treated as continuing do not apply for CT purposes.

(3) Yearly interest is tax deductible.

Are management expenses relating to let mineral rights tax deductible?

(4) A company that lets mineral rights in the Republic of Ireland (ROI), is entitled, in computing its income for corporation tax purposes, to deduct related management expenses (subject to the restrictions that apply to those deduction for income tax purposes).

How is income from a foreign trade computed for CT?

(5) Income from a foreign trade is computed as if the trade were carried on in the ROI.

Is foreign tax deductible against foreign income?

(6) The amount of foreign income to be brought into charge for corporation tax purposes is the income as reduced by foreign tax on such income.

Is foreign tax deductible in computing foreign interest income?

(6A) If a company’s trading income includes foreign interest (relevant interest) it may reduce such income by the relevant foreign tax attached to that income but not so as to create a loss.

Is foreign tax deductible in computing foreign royalty income?

(6B) If a company’s trading income includes foreign royalties (relevant royalties) it may reduce such income by the relevant foreign tax attached to that income but not so as to create a loss.

Are the profits of a foreign company’s Irish branch subject to tax?

(7) An Irish branch of a foreign company is liable to Irish CT on the foreign source income of that branch.

How are company gains calculated?

(1) A company’s chargeable gains are calculated as if tax years were accounting periods (see (2)). The notional capital gains tax (CGT) is grossed up to produce a figure, which, when taxed at the corporation tax (CT) rate, results in CT equal to the notional CGT (see (3)).

Can a company deduct allowable losses?

(2) A company is taxed on its net chargeable gains for an accounting period after deducting allowable losses for that period and any allowable losses carried forward.

How is the CGT grossed up?

(3) The notional CGT is grossed up to an amount which, when taxed at the CT rate, produces CT equal to the notional CGT.

If an accounting period straddles two financial years with different CT rates, the notional CGT is grossed up at an assumed CT rate determined by apportioning the rates for the two financial years by reference to the lengths of the respective parts of the accounting period falling in each financial year.

The period 1 January 1996 to 31 March 1997, and the period 1 April 1997 to 31 December 1997 are each treated as a financial year for that purpose.

Are company development land gains subject to CGT?

(4) Company development land gains remain chargeable to CGT (not CT).

A company’s relevant allowable losses are those occurring in the accounting period, together with those carried forward from earlier years (for which the company was within the charge to CT).

Do the CGT computation rules apply for CT?

(5) Company chargeable gains and allowable losses are computed in accordance with CGT principles, as if accounting periods were tax years.

How are CGT principles applied for CT

(6) In applying the CGT principles to CT, references to income tax are to be read as references to CT except in relation to CGT provisions that apply only to individuals (for example, principal private residence relief (section 604)).

Can a transaction have distinct corporation tax and CGT consequences?

(7) The operation of CGT and CT is not affected by the fact that the same transaction has a CGT consequence for an individual and a CT consequence for your company.

Does the vesting of company assets in a liquidator constitute a disposal?

(8) The vesting of a company’s assets in a liquidator is not regarded as a disposal. The liquidator’s acts are treated as acts of the company, and dealings in company assets between the liquidator and the company are to be ignored.

Are exchange gains part of trading income?

(1)-(2) In computing trading income for corporation tax purposes account must be taken of foreign exchange gains or losses on a relevant contract, or a relevant monetary item, that:

(a) result directly from a change in the rate of exchange,

(b) are trade-related (including capital gains and losses), and

(c) are properly accrued in the profit and loss account in accordance with standard accounting practice (SSAP 20 – Accounting for Foreign Currency Transactions).

In this regard:

(a) A relevant contract is a contract designed to reduce foreign exchange risk as a result of holding or owing money. It does not include money receivable. Such a contract would include hedging instruments such as swaps and forward rate agreements. It could also include a foreign currency deposit used to hedge a future trade-related debt in that foreign currency.

(b) A relevant monetary item means money held or owed by a company for the purposes of its trade.

(c) A rate of exchange is an arm’s length exchange rate for two different currencies.

(d) Profit and loss account means a profit and loss account of an Irish resident company or of the Irish branch of a foreign company. The profit and loss account must be audited (Companies Act 1963 section 160).

The fact that exchange gains/losses can be treated as trading income/losses does not mean that other related income (arising from the contract) can be treated as trading income. Any such related income is taxable under other tax rules.

Companies incorporated in a jurisdiction with no statutory audit requirement must file audited accounts of the Irish branch operation with the Companies Registration Office (European Communities (Branch Disclosures) Regulations 1993 (SI 395/1993)).

A company’s functional currency is the currency of the primary economic environment in which it operates. The functional currency of a foreign company is the currency of the primary economic environment in which it trades in the ROI. In both cases, if the accounts are prepared in euro, the functional currency is the euro (section 402).

A company whose functional currency is other than the euro may compute its exchange gains and losses in that functional currency.

(3) A trade-related exchange gain/loss must not be used in computing a chargeable gain/loss.

However, exchange gains accruing to a life company on an “investment minus earnings” (I-E) basis (section 707) may still be treated as chargeable gains.

Exchange gains or losses are not, in any event, to be included in the computation of chargeable gains or losses: sections 551, 554.

Are exchange gains on a hedging contract chargeable gains?

(4) A company with a functional currency other than the euro could enter into a hedging contract (a relevant tax contract) to reduce or eliminate the risk of an exchange rate fluctuation which could affect its CT liability.

An exchange gain on such a contract is not a chargeable gain to the extent that it does not exceed the exchange loss accruing on the tax liability.

An exchange loss is not an allowable loss to the extent that it does not exceed the exchange gain accruing on the tax liability.

Can a company match exchange gains and losses in the same currency?

(1) A company may have the following situation:

(a) It disposes of a shareholding (25% or more in a trading company or its holding company) held in a foreign currency (a relevant foreign currency asset) giving rise to a capital gain.

(b) It has a corresponding foreign currency liability.

This section allows it to match the two, and pay tax based on the net gain.

Once it has matched the asset with the liability, it is deemed to discharge the liability when it disposes of the asset.

How does a company opt to match exchange gains and losses?

(2) If a company wishes to to match a relevant foreign currency asset with a corresponding foreign currency liability, it must write to the inspector stating that it wishes to do so. It must give notice within three weeks of acquiring the foreign currency asset.

How is the gain on disposal of a matched relevant foreign currency asset calculated?

(3) If a company disposes of a “matched” relevant foreign currency asset, the chargeable gain (or allowable loss) is computed as follows:

(a) if there is an exchange loss, the consideration may be reduced by the amount of the loss, but the reduction may not exceed the gain on disposal of the asset,

(b) if there is an exchange gain, the consideration may be increased by the amount of the gain, but the increase may not exceed the loss on disposal of the asset.

Can an exchange gain be matched with with a capital loss?

(1) A financial services company may have:

(a) An exchange gain on a non-euro loan ( foreign currency asset).

(b) A corresponding loss on redeemable share capital (a relevant foreign currency liability) issued to protect against from currency risk. The exchange gain on the loan is “matched” with a corresponding loss on the share capital.

In the absence of relief, the exchange gain is taxed (12.5%), and there is no allowance for the loss on the share capital.

A claim may be made to match the two and pay tax on the net gain.

Once the asset is matched with the liability, the liability is discharged on disposal of the asset.

How does a company opt to match an exchange gain with a capital loss?

(2) If a company wishes to to match a relevant foreign currency asset with a corresponding foreign currency liability, it must write to the inspector stating that it wishes to do so. It must give notice within three weeks of acquiring the foreign currency asset.

What happens once an exchange gain is matched with a capital loss?

(3) Once an exchange gain has been matched with a capital loss, only include the net gain or loss need be included when computing trading income for the period.

How are exchange gains of a holding company treated?

(1) A net foreign exchange gain arises when the disposal of currency in a relevant bank deposit by a relevant holding company produces an excess of foreign exchange gains over losses. A net foreign exchange loss arises where there is an excess of foreign exchange losses over gains. Trading gains or losses do not count in this context.

A relevant bank deposit means a sum standing to the credit of a relevant holding company in a bank and which is not denominated in the currency of the State.

A relevant holding company means a company:

(a) with a least one wholly owned subsidiary which derives its income from trading, or

(b) which acquires or establishes such a subsidiary, within one year of a net foreign exchange gain being credited to its accounts.

A net foreign exchange gain and a net foreign exchange loss are subject to corporation tax and not capital gains tax.

Profit and loss account has the same meaning given to it by generally accepted accounting practices and includes an income and expenditure account prepared in accordance with international accounting standards.

Approved accounting standards means Irish generally accepted accounting practice (Irish GAAP) or International FinancialReporting Standards (IFRS).

Are holding company foreign currency deposits treated as assets?

(2) Currency held in a relevant bank deposit is not regarded as an asset for capital gains purposes.

What tax rate applies to holding company exchange gains?

(3) The amount of a holding company’s exchange gains chargeable under Schedule D Case IV is (C/B) x A where A is the net foreign exchange gain credited to relevant holding company’s profit and loss account as reduced by any loss under section 383 as is attributable to a net foreign exchange loss and which has not been deducted from any other income and B is the higher rate of Corporation Tax (25%) and C is the rate of Capital Gains Tax (33%).

This ensures the rate applicable to such gains is 33% .

Are holding company exchange gains subject to CT?

(4) Holding company exchange gains are not subject to CT unless the holding company accounts are prepared in accordance with approved accounting standards.

Can exchange losses br carried forward to the CT regime?

(5) A relevant holding company can carry forward an unused exchange loss (section 546) as if it were a CT loss (section 383).

Can double relief be claimed for exchange losses?

(6) A holding company can claim relief for exchange losses under section 383(5) or section 546(6) but not both.

Can the capital allowance on leased assets be matched with the asset’s life?

(1) There are special rules for a leasing company with income from leasing assets with a predictable useful life which does not exceed eight years (relevant short-term assets) over a period less than eight years (relevant short-term lease). Under existing rules, the gross lease payments are treated as income and there is a capital allowance for the asset over eight years (12.5% each year). This results in a mismatch between the useful life of the asset (say three years) and the write-down period (eight years).

The alternative treatment to prevent the mismatch is described in (2).

How is income from short-term leasing an asset taxed?

(2) If an asset with a three year useful life is leased for a three year period, the asset may be written off for tax purposes over that period. On claiming such treatment:

(a) normal accounting rules apply,

(b) no capital allowance is given for the asset, and

(c) the net income from leasing the asset is taxed.

(2A) For accounting periods commencing on or after 1 January 2010, a group company may opt to be taxed on the accounting profit from a lease.

The relief is given in respect of specified assets, i.e. assets which give rise to a capital allowance, and which are leased under a relevant short-term lease (i.e. one that does not exceed eight years).

The income from such assets is treated as not arising from a trade of leasing.

For specified periods ending on or before 31 December 2014 the wear and tear allowance to be made (under accounting rules) is subject to a limit, calculated as

E  x  F
G

where

E is the group limit,

F is the cost of the specified assets at the end of the accounting period,

G is the cost of the specified assets owned by all group members at the end of the accounting period.

The group limit is calculated as

A + (B  x  C – D)
C

where

A is the threshold amount, i.e. the aggregate of all capital allowances granted to group members in respect of expenditure on specified assets in the threshold period, i.e. the one year accounting period ending on the day preceding the first day of the first specified period on or after 1 January 2010.

In practical terms, this means that the new treatment will only apply to operating leases of short-life assets in excess of a group threshold – it will only apply to increases in the portfolio of assets held by the group. The existing tax treatment continues to apply to amounts below the threshold.

For specified periods ending on or after 1 January 2015 wear and tear allowance claimed can equal (but not exceed) the depreciation or amortisation charged in the company’s Profit and Loss Account.

What is a group?

(2B) Two companies are members of a group if one is a 51% subsidiary of the other, or both are 51% subsidiaries of a third company. However, in this regard, shares held as trading stock (shares which, if sold, would give rise to a trading profit,) do not count.

In addition, the parent company must be entitled to 51% of the subsidiary’s distributable profits, and 51% of the subsidiary’s assets if it is being wound up.

A company and its 51% subsidiaries constitute a group.

A company may be treated as a member of a threshold group in order to determine the threshold amount for thespecified period of a relevant group.

In such a case, even if the threshold group and the relevant group are not identical (i.e. a company may be a member of one group but not the other or vice versa), the two groups can be treated as identical, provided one or more persons with a “reasonable commonality of identity” control both groups.

What is the deadline for claiming taxation on the basis of accounting profit?

(3) A claim to be taxed on the accounting profit arising from short-term leasing must be made on or before the self-assessment filing date. The claim applies to expenditure incurred on or after the first day in the accounting period covered by that return.

What expenditure is tax-deductible?

(1) This section lists types of expenditure that are not tax-deductible. See also section 840 which disallows expenditure on entertainment (and on assets used for entertainment), section 376 which restricts motor expenses, and section 1089 which disallows interest on unpaid taxes.

In computing trading profits, only deductions authorised by tax law are allowable.

Capital expenditure is not deductible. However you may be entitled to a capital allowance in respect of expenditure onplant and machinery and certain premises used for your business.

The distinction between capital and revenue expenditure has been the subject of hundreds of cases which can be illustrated by the analogy of the tree and its fruit. The source of income (i.e., the capital) is the tree; income is the fruit of the tree. A payment made for the fruit of the tree is revenue expenditure; a payment made for the tree itself is capital expenditure.

Capital expenditure is expenditure which has an “enduring benefit”: British Insulated and Helsby Cables Ltd v Atherton, (1925) 10 TC 155. The following have been held to be capital expenditure, and therefore not deductible:

(a) A premium on a lease: Strick v Regent Oil Co Ltd, (1965) 43 TC 1.

(b) Compensation payment made for loss of a construction contract: “Countess Warwick” Steamship Co Ltd v Ogg, (1924) 8 TC 652 and Devon Mutual Steamship Insurance Association v Ogg, (1927) 13 TC 184 and Watney Combe Reid and Co Ltd v Pike, Watneys London Ltd v Pike, [1982] STC 733.

(c) A payment for release from a loan agreement: Whitehead v Tubbs (Elastics) Ltd, [1984] STC 1. But seeVodafone Cellular Ltd and others v Shaw, [1997] STC 734.

(d) The cost of preserving a factory: Bradbury v The United Glass Bottle Manufacturers Ltd, (1959) 38 TC 369.

(e) Tied house monopoly payments: Kneeshaw v Albertolli, (1940) 23 TC 462 and Henriksen v Grafton Hotels Ltd, (1942) 24 TC 453.

(f) A payment for closure of competing works: United Steel Co Ltd v Cullington (No 1), (1939) 23 TC 71.

(g) A payment for a cut in production: Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd, (1964) 43 ATC 20

(h) The cost of a company share reorganisation: Davis v Hibernian Bank, 1 ITR 503.

(i) The cost of investments: Smith (John) and Son v Moore, (1921) 12 TC 266 and London Bank of Mexico v Apthorpe [1891] 2 QB 378, 3 TC 143.

(j) Relocation expenses: Granite Supply Association Ltd v Kitton, (1905) 5 TC 168, Arthur Young McClelland Moores and Co v MacKinlay, [1989] STC 898.

(k) The cost of purchasing and planting trees on bogland: Connolly v WW, (1975) 2 ITR 657.

Not all payments having an enduring benefit are capital payments: Anglo Persian Oil Company Ltd v Dale, (1931) 16 TC 253. In that case, a payment to end an agency agreement was held to be of a revenue nature, and therefore deductible. In Bolam v Regent Oil Co Ltd, (1956) 37 TC 56, advance payments on five-year agreements were held to be fully deductible. See also Alianza Co Ltd v Bell, (1905) 5 TC 60, 172; BP Australia Ltd v Australia Commissioner of Taxation, (1965) 44 ATC 312; Mobil Oil Australia Ltd v Australia Commissioner of Taxation, (1965) 44 ATC 323; RTZ Oil and Gas Ltd v Elliss, [1987] STC 512.

Expenditure on acquiring a fixed asset is capital expenditure and therefore not allowable: Tucker v Granada Motorway Services Ltd, (1979) 53 TC 92, [1979] STC 393; IRC v Sharp (William) and Son, (1959) 38 TC 341; Indian Radio and Cable Communications Co Ltd v IT Commissioners, [1937] 3 All ER 709. Even where made by instalments: IRC v Pattison and others, (1959) 38 TC 617; S Ltd v O’Sullivan, 2 ITR 602, but see Ogden v Medway Cinemas Ltd, (1934) 18 TC 691.

Hire of plant that amounts to purchase of the equipment is not deductible: IRC v Land Securities Investment Trust Ltd, (1969) 45 TC 495; Littlewoods Mail Order Stores Ltd v McGregor, (1969) 45 TC 519; Ainley v Edens, (1935) 19 TC 303; Dow v Merchiston Castle School Ltd, (1921) 8 TC 149; Ralli Estates Ltd v East Africa Income Tax Commissioner, (1961) 40 ATC 9; IRC v Adam, (1928) 14 TC 34; Boyce v Whitwick Colliery Co Ltd, (1934) 18 TC 655.

Revenue policy on finance leasing is explained in Revenue leaflet IT52, Taxation treatment of finance leases, April 1997; Tax Briefing 24, December 1996, and Tax Briefing 25, February 1997. In essence, a lessee can deduct the ordinary recurring lease payments, and any larger initial payment, when calculating profits for tax purposes. On the return the asset to the leasing company, or the purchase of theasset from the company, the lessee is taxed on the rebate of rentals received (generally equivalent to the asset’s market value at that time). The amount of a rebate of rentals represents a return of leasing charges already allowed for tax purposes. You may however claim capital allowances based on the asset’s market value at the date the lease ends.

Hire purchase instalments are to be apportioned between capital and revenue: Darngavil Coal Co Ltd v Francis, (1913) 7 TC 1.

In general, revenue expenditure is deductible. Recurrent expenditure on maintaining or protecting a capital asset is revenue expenditure and is therefore deductible: Vallambrosa Rubber Company Ltd v Farmer, (1910) 5 TC 529. In that case, the expenditure was on protecting a plantation of immature rubber trees. See also Duple Motor Bodies Ltd v Ostime, (1961) 39 TC 537. The following were held to be revenue expenditure:

(a) A payment to preserve goodwill: Cooke v Quick Shoe Repair Service, (1949) 30 TC 460 and Walker v Cater Securities, Ltd, [1974] STC 390. Even if made in one large cash payment: Lawson v Johnson Matthey plc, [1992] STC 466, Stone and Temple Ltd v Waters, [1995] STC 1.

(b) Expense of removing the top soil of a quarry: Milverton Quarries Ltd v Revenue Commissioners, 2 ITR 382.

(c) Compensation paid to tenants adjoining a new factory for loss of rights: Davis v X Ltd, 2 ITR 45.

(d) Lump sum payments made by a main distributor to petrol retailers in return for exclusive dealing in the company’s product: Dolan v AB Company Ltd, 2 ITR 515.

(e) A payment to cancel a know-how agreement: Vodafone Cellular Ltd and others v Shaw, [1997] STC 734.

(a) Expenditure that is not wholly and exclusively for the purposes of your trade or profession.

(b) Private or domestic expenditure.

(c) Rent paid for a private house, unless part of it is used for the trade or profession. If such a part is used, a deduction (not to exceed two-thirds or the rent) may be agreed with the inspector.

(d) Repairs of premises or equipment over and above the amount actually spent on such repairs.

(e) Losses not connected with your trade or profession.

(f) Drawings or sums intended to be used as capital.

(g) Capital expenditure on improvements of premises used for the trade or profession.

(h) Interest. This is because interest payable is deductible as a “charge”.

(i) Debts other than bad debts that have been written off in your accounts as irrecoverable. A general provision (for example, a provision expressed as a percentage of sales) for bad debts is not deductible for tax purposes.

(j) Any loss over and above the amount actually lost.

(k) Any amount recoverable through insurance or indemnity.

(l) Any annual payment or charge (other than interest).

(m) Any patent royalty.

(n) Consideration given to a supplier or an employee of your company which consists of shares in that company (or a connected company), except to the extent that

(i) it consists of expenditure genuinely incurred by your company in acquiring the shares at an arm’s length market price,

(ii) in the case of shares in a connected company, the payment does not exceed the arm’s length price payable between independent parties, or

(iii) it consists of expenditure incurred or payments made to the connected company in (ii) for bona fide commercial reasons and not as part of a tax avoidance scheme.

(o) A sum paid to a connected person to obtain tax treaty benefits, or sum paid to a connected person in a non-treaty country for a similar benefit.

Only expenditure incurred wholly and exclusively for the purposes of the trade is tax-deductible. Expenses having adual private and business purpose are not deductible, for example:

(a) Hospital expenses (even though the taxpayer conducted his business from his hospital bed): Murgatroyd v Evans Jackson, (1966) 43 TC 581.

(b) The cost of an operation on a guitarist’s little finger: Prince v Mapp, (1969) 46 TC 169.

(c) Lunch expenses of a self-employed carpenter: Caillebotte v Quinn, [1975] STC 265.

(d) Expenditure incurred by an engineer on upkeep of overalls and boiler suit: Hillyer v Leeke, (1976) 51 TC 590.

(e) The cost of barrister’s dark clothing even though it was only worn for court appearances: Mallalieu v Drummond, [1983] STC 665. This decision means that expenditure on clothing is non-deductible and casts into doubt the validity of the extra-statutory concession granted to Schedule E employees for upkeep of uniforms and protective clothing (see notes to sections 113–114).

Apportionment is allowed where the business part of the expenditure can be segregated: Bentleys Stokes and Lowless v Beeson, (1952) 33 TC 491.

The following expenses were allowed as having been incurred wholly and exclusively for the purposes of the business:

(a) Hire of plant which does not amount to purchase (see Capital Expenditure above), Racecourse Betting Control Board v Wild, (1938) 22 TC 182.

(b) Payments for technical assistance: British Sugar Manufacturers Ltd v Harris, (1937) 21 TC 528 and in Paterson Engineering Co Ltd v Duff, (1943) 25 TC 43.

(c) Campaign expenses incurred to prevent nationalisation of the taxpayer’s trade: Morgan v Tate and Lyle Ltd, (1954) 35 TC 367.

(d) Petition costs: Cooper v Rhymney Breweries Ltd, (1965) 42 TC 509.

The following expenses were disallowed as not incurred wholly and exclusively for the purposes of the business:

(a) Hospital subscriptions: Bourne and Hollingsworth Ltd v Ogden, (1929) 14 TC 349.

(b) A share of trust borrowings to make good a beneficiary’s deficiency of income: Bowen v IRC, (1937) 21 TC 93.

(c) Equipment hired, but not used for the purpose of the trade: Allied Newspapers Ltd v Hindsley, (1937) 21 TC 422.

(d) Political contributions: Boarland v Kramat Pulai Ltd, (1953) 35 TC 1.

(e) Expenses of a trustee in lunacy: IRC v McIntosh (Curator bonis to McMillan), (1955) 36 TC 334.

(f) Payments (runners’ allowances) not directly related to the trade: Young v Racecourse Betting Control Board, (1959) 38 TC 426.

(g) Excessive service company charges: Stephenson v Payne, Stone, Fraser and Co, (1967) 44 TC 507.

(h) Loans to an employees’ trust: Rutter v Charles Sharpe and Co Ltd, [1979] STC 711.

(i) Payments to secure closure of a competitor: Walker v Joint Credit Card Co Ltd, [1982] STC 427.

(j) Domestic relocation expenses of a partner: Arthur Young McClelland Moores and Co v MacKinlay, [1989] STC 898.

In IRC v Dowdall O’Mahony and Co Ltd, (1951) 33 TC 259, the UK branch of an Irish company was denied a deduction of the proportionate share of the Irish tax (as the Irish tax was not wholly and exclusively for the UK branch trade).

Expenses typically regarded as incurred wholly and exclusively for the purposes of the business are:

(a) The cost of stock (see notes to section 18, Accounting Rules).

A trader may offer a “free gift” to a customer who buys certain items, for example a trader may give a radio worth €20 to each purchaser of a washing machine (worth €400). In these circumstances, the contract between the customer and the trader involves both the washing machine and the radio. In effect, the radio is not a “free gift”, and the cost of the radio is allowable. The cost of the radio is not disallowable as entertainment expenditure (section 840) (Revenue Precedent IT94-3520, 18 January 1995).

(b) Customer guarantees and warranties, if directly related to the trade: Jennings v Barfield, (1962) 40 TC 365;Lunt v Wellesley, (1945) 27 TC 78; Bolton v Halpern and Woolf, [1981] STC 14. But not otherwise: Morley v Lawford and Co, (1928) 14 TC 229; Ascot Gas Water Heaters Ltd v Duff, (1942) 24 TC 171; Garforth v Tankard Carpets Ltd, [1980] STC 251; Redkite Ltd v Insp of Taxes SpC 93, [1996] SWTI 1807.

A reasonable estimate of future warranty liabilities was allowed in IRC v Mitsubishi Motors New Zealand Ltd, [1995] STC 989.

(c) Employee costs: salaries, wages, unless excessive: Stott and Ingham v Trehearne, (1924) 9 TC 69; Johnson Bros and Co v IRC, (1919) 12 TC 147; Copeman v Flood (Wm) and Sons Ltd, (1940) 24 TC 53; Dollar (trading as I J Dollar) v Lyon, [1981] STC 333; Earlspring Properties Ltd v Guest, [1995] STC 479. Including the cost of an employee on secondment to a subsidiary: Robinson v Scott Bader and Co Ltd, [1981] STC 436.

See also Eyres v Finnieston Engineering Co Ltd, (1916) 7 TC 74; Lowry v Consolidated African Selection Trust Ltd, (1940) 23 TC 259; Deverell Gibson Hoare Ltd v Rees, (1943) 25 TC 467; Faulconbridge v Thomas Pinkney and Sons Ltd, (1951) 33 TC 415; Howard (Alexander) and Co Ltd v Bentley, (1948) 30 TC 334; IRC v Bell, (1927) 12 TC 1181 and Owen and Gadson v Brock, (1951) 32 TC 206.

If the appropriate conditions are met, the premiums payable under a keyman policy may be allowed as a business expense for the accounting period in which they are payable. Conversely, any benefit paid under the policy should be treated as a trading receipt for the accounting period in which it is paid (Inspector Manual 4.6.1).

The Appeal Commissioners have held that PAYE/PRSI not deducted from employees wages, and comprised in a settlement (excluding interest and penalties reached with Revenue) was not allowed: 6 AC 2000.

(d) Employee costs: redundancy. A payment to get rid of an employee is deductible, even though it may have an enduring benefit: Mitchell v B W Noble Ltd, (1926) 11 TC 372; IRC v Patrick Thomson Ltd, (1956) 37 TC 145 andSmith v Incorporated Council of Law Reporting for England and Wales, (1914) 6 TC 477.

Such payments are disallowed if connected with the sale or cessation of the business: Royal Insurance Co v Watson(1896) 3 TC 500; Smith (George J) and Co Ltd v Furlong, (1968) 45 TC 384; IRC v Anglo-Brewing Co Ltd, (1925) 12 TC 803; Bassett Enterprise Ltd v Petty, (1938) 21 TC 730; Snook (James) and Co Ltd v Blasdale, (1952) 33 TC 244;Godden v A Wilson’s Stores (Holdings) Ltd, (1962) 40 TC 161; Peters (George) and Co Ltd v Smith, (1963) 41 TC 264 and could be treated as a distribution following the case Overy v Ashford Dunn and Co Ltd, (1933) 17 TC 497.

Pre-cessation payments to employees were allowed in O’Keeffe v Southport Printers Ltd, [1984] STC 443.

(e) Employee costs: pension costs. These are now allowed by section 774(6). The initial cost of setting up a pension fund was held to be capital in Atherton v British Insulated and Helsby Cables Ltd, (1925) 10 TC 155;Morgan Crucible Co Ltd v IRC, (1932) 17 TC 311; Hutchinson and Co (Publishers) Ltd v Turner, (1950) 31 TC 495;Rowntree and Co Ltd v Curtis, (1924) 8 TC 678. See also Hancock v General Reversionary and Investment Co Ltd, (1918) 7 TC 358; Green v Gravens Railway Carriage and Wagon Co Ltd, (1951) 32 TC 359; Lowe v Peter Walker (Warrington) and Robert Cain and Sons Ltd, (1935) 20 TC 25; Clark (JH) and Co Ltd v Musker, (1956) 37 TC 1.

(f) Legal costs are allowed in relation to:

(i) Defending title to a company’s land: Southern v Borax Consolidated Ltd, (1940) 23 TC 597.

(ii) Buying back shares of dissident shareholders and changing the company’s charter: IRC v Carron, 45 TC 18.

(iii) Defending an action for damages: Bihar and Orissa Income Tax Commissioners v Maharaja Sir Rameshwar Singh of Dharbanga, (1941) 20 ATC 337.

(iv) Avoiding expulsion from the Stock Exchange: McKnight v Sheppard, [1999] STC 669.

(v) Promoting a parliamentary bill that would benefit the taxpayer: McGarry v Limerick Gas Committee, 1 ITR 375.

Legal costs incurred in acquiring a capital asset are treated as capital expenditure. Once the asset has been acquired, expenditure incurred in protecting the title of that asset may be deductible revenue expenditure (Revenue Precedent IT94-3501, 19 April 1994). See Southern v Borax Consolidated Ltd, (1940) 23 TC 597, noted above.

Legal costs are not allowed in relation to:

(i) Capital expenditure: Texas Land and Mortgage Co v Holtham (1894) 3 TC 255; Thomson (Archibald) Black and Co Ltd v Batty, (1919) 7 TC 158; Southwell v Savill Bros Ltd, (1901) 4 TC 430; Morse v Stedeford, (1934) 18 TC 457; Pendleton v Mitchells and Butlers Ltd, (1968) 45 TC 341; Pyrah v Annis and Co Ltd, (1956) 37 TC 163;Moore (A and G) and Co v Hare, (1914) 6 TC 572; Small v Easson, (1920) 12 TC 351, Montreal Cake and Manufacturing Co v Minister of National Revenue, (1944) AER 743; Ceylon CIR v Appuhamy, (1962) 41 ATC 317, ECC Quarries Ltd v Watkis, [1975] STC 578. For an Irish case, see Casey v AB Ltd, 2 ITR 500.

(ii) Disputes between partners: C Connelly and Co v Wilbey, [1992] STC 783.

(iii) Forming a holding company: Kealy v O’Mara Ltd, 1 ITR 642.

(iv) Appealing against a tax assessment: Allen v Farquharson Bros and Co, (1932) 17 TC 59; Smith’s Potato Estates Ltd v Bolland, (1948) 30 TC 267; Rushden Heel Co Ltd v Keene, (1948) 30 TC 298; Worsley Brewery Co Ltd v IRC, (1932) 17 TC 349; Meredith v Roberts, (1968) 44 TC 559; Spofforth and Prince v Golder, (1945) 26 TC 310.

Professional fees incurred in connection with a tax appeal are not deductible. Normal recurring fees are allowable (Revenue Precedent IT95-2564, 10 October 1995).

Where a tax return is selected for audit, and the normal recurring professional fees in that case would be allowed as a deduction, any additional professional fees incurred by the taxpayers in consequence of the audit are allowable as a deductible expense provided that they are reasonable in the circumstances and do not relate to tax planning and/or avoidance matters.

Any part of professional fees incurred in connection with a back-duty settlement may be allowed as tax deductible to the extent that they relate to the preparation of accounts. However, any expenses applicable to the negotiation of a settlement are not allowable. Where necessary, fees should be apportioned so as to identify allowable and disallowable fees (Tax Briefing 11, July 1993).

(g) Trade membership subscriptions were allowed in Lochgelly Iron and Coal Co Ltd v Crawford, (1913) 6 TC 267; Adam Steamship Co Ltd v Matheson, (1920) 12 TC 399; Guest Keen and Nettlefolds Ltd v Fowler, (1910) 5 TC 511; Thomas v Richard Evans and Co Ltd, (1927) 11 TC 790, Clifford (Charles) and Son Ltd v Puttick, (1928) 14 TC 189; Thompson (Joseph L) and Sons Ltd v Chamberlain, (1962) 40 TC 657.

They were not allowed in Grahamston Iron Co v Crawford, (1915) 7 TC 25; Rhymney Iron Co Ltd v Fowler (1896) 3 TC 476; Thomas Merthyr Colliery Co Ltd v Davis, (1932) 17 TC 519; Collins v Joseph Adamson and Co, (1937) 21 TC 400.

Trade and professional association subscriptions are generally allowable (4.6.6; 5.2.9) as are payments by solicitors to the solicitors’ compensation fund (Inspector Manual 4.6.9).

Registration fees, and licence renewal fees, which a trader or professional person is required by law to pay are deductible, provided they are laid out wholly and exclusively for the purposes of the trade (Revenue Precedent IT89-1143, 2 June 1993).

A self-employed medical practitioner who must be registered with the Medical Council in order to practise is entitled, in computing his profits for tax purposes, to deduct the cost of the retention fee paid to the Council in order to remain on the register (Revenue Precedent IT95-3357, 24 August 1995).

Fees (insurance) paid by a self-employed medical practitioner to the Medical Protection Society are deductible for tax purposes. If due, a refund of such fees is paid by the Health Board, net of tax. Such a refund is taxable in the hands of the recipient. Tax relief is due on the net amount paid in each case, i.e., the gross payment made less the actual refund received (Revenue Precedent IT95-3548, 20 September 1995).

A compensation fund (which is also a trade protection association) is allowed a deduction against its income for insurance premiums and claims paid (Revenue Precedent IT97-2510, 25 August 1997).

(h) Exchange losses on currency transactions (but not in relation to capital transactions): Pattison v Marine Midland Ltd, (1983) 57 TC 219, [1984] STC 10; Overseas Containers (Finance) Ltd v Stoker, [1989] STC 364, Beauchamp v F W Woolworth plc, [1989] STC 510, Brosnan v Mutual Enterprise Ltd, [1995] 2 ILRM 304.

In Revenue Commissioners v L and Co, 2 ITR 281, a devaluation loss was not allowed against the profits of an Irish permanent establishment as although it had been credited, it had not been transferred to the foreign resident company.

Section 79 allows trade-related currency gains on hedging instruments to be treated as part of trading income. Corresponding payments are deductible revenue expenses.

A taxpayer incurred an exchange loss on a five year loan to buy plant. In Mutual Enterprises Ltd, the CCJ held, on the facts of the particular case that the borrowings were on revenue account. The High Court decision indicated that the judge would have attached significance to the fact that the money was borrowed to buy a capital asset. The Supreme Court held that the question of whether borrowings are a means of temporary and fluctuating accommodations is a question of fact rather than law. In other words, on the facts of the particular case, the exchange loss on a capital item was deductible (Revenue Precedent IT 97-2000, 15 January 1997).

Private or domestic expenditure is not deductible. This includes:

(a) The cost of private living accommodation: Mason v Tyson, [1980] STC 284).

(b) The cost of living accommodation above a public house: McLaren v Mumford, [1996] STC 1134.

(c) Food and accommodation expenses: Prior v Saunders, [1993] STC 562.

(d) Medical expenses: Norman v Golder, (1944) 26 TC 293. See also Prince v Mapp, (1969) 46 TC 169.

(e) Domestic running expenses: Thomas v Ingram, [1979] STC 1.

(f) The cost of travelling to a place of work: Newsom v Robertson, (1952) 33 TC 452; Sargent v Barnes, (1978) 52 TC 335. The cost of travelling between two or more places of work is deductible: Horton v Young, (1971) 47 TC 69. Overseas travel was allowed in Edwards v Warmsley Henshall and Co, (1967) 44 TC 431 but disallowed in Sargent v Eayrs, (1972) 48 TC 573.

Rent paid for a private house is not allowed. Nevertheless, this implies that rent of a business premises is fully deductible: IRC v Falkirk Iron Co Ltd, (1933) 17 TC 625, Hyett v Lennard, (1940) 23 TC 346, Union Cold Storage Co Ltd v Adamson, (1931) 16 TC 293, Heastie v Veitch and Co, (1933) 18 TC 305, Wildbore v Luker, (1951) 33 TC 46.

In Herbert Smith (a firm) v Honour, [1999] STC 173, it was held that a provision in the accounts for future rents was properly deductible in computing the profits and did not contradict the rule against anticipation of liabilities. It was an essential charge.

The Appeal Commissioners have held that the rent charged to partnership accounts in respect of a premises owned by the three partners, although not charged in the same ratio as the profit-sharing ratio, was deductible: 7 AC 2000.

Payments to cancel a lease are usually capital: Cowcher v Mills (Richard) and Co Ltd, (1927) 13 TC 216, Union Cold Storage Co Ltd v Ellerker, (1939) 22 TC 547, Dain v Auto Speedways Ltd, (1959) 38 TC 525, West African Drug Co Ltd v Lilley, (1947) 28 TC 140. Tucker v Granada Motorway Services Ltd, (1979) 53 TC 92, [1979] STC 393, Mallett v Staveley Coal and Iron Co Ltd, (1928) 13 TC 772.

Excessive repair costs on premises or equipment are not allowed. Nevertheless, this implies that repairs of a business premises are fully deductible. The following repairs have been allowed as revenue expenditure:

(a) Moorings: Re King’s Lynn Harbour Mooring Commissioners (1875) 1 TC 23.

(b) Railway line: Rhodesia Railways Ltd v Bechuanaland Protectorate IT Collector, [1933] AC 368.

(c) Wreck removal: Whelan v Dover Harbour Board, (1934) 18 TC 555.

(d) Dredging: Dumbarton Harbour Board v Cox, (1919) 7 TC 147.

(e) Alterations: Conn v Robins Bros Ltd, (1966) 43 TC 266.

(f) Tied house:Youngs Crawshay and Youngs Ltd v Brooke, (1912) 6 TC 393, Usher’s Wiltshire Brewery Ltd v Bruce, (1914) 6 TC 399.

(g) Replacement of plant (weighbridge) but which did not contain any element of improvement: Hodgins v Plunder and Pollack (Ireland) Ltd, 3 ITR 267.

Losses unconnected with the trade are not allowed. In Strong and Co of Romsey Ltd v Woodifield, (1906) 5 TC 215, it was held that a sum of damages paid to a hotel guest on whom a chimney fell was not deductible, as the expenditure did not arise out of the trade. In Bamford v ATA Advertising Ltd, (1972) 48 TC 359 it was held that the cost of misappropriations by a dishonest director was not deductible. See also Curtis v Oldfield (J and G) Ltd, (1925) 9 TC 319,Roebank Printing Co Ltd v IRC, (1928) 13 TC 864.

Non-trading losses were disallowed in IRC v Alexander von Glehn and Co Ltd, (1920) 12 TC 232.

Fines paid are not deductible: IRC v Warnes (EC) and Co Ltd, (1919) 12 TC 227; IRC v Alexander Von Glehn and Co Ltd, (1920) 12 TC 232; Fairrie v Hall, (1947) 28 TC 200; Knight v Parry, (1972) 48 TC 580; Hammond Engineering Co Ltd v IRC, [1975] STC 334. Unless closely related to the trade: Cattermole v Borax and Chemicals Ltd, (1949) 31 TC 202; Scammell (G) and Nephew Ltd v Rowles, (1939) 22 TC 479; Golder v Great Boulder Proprietary Gold Mines Ltd, (1952) 33 TC 75.

Protection money is not deductible (Revenue Precedent IT97-2501, 29 January 1997).

The superlevy penalty (i.e., a payment under the European Communities (Milk Levy) Regulations 1985, SI 416/1985) collected by Co-ops from a farmer for exceeding his milk quota is a deductible expense of a farming trade (Revenue Precedent IT90-3106,18 October 1990).

Drawings are not allowed. Drawings are an application of profits already earned. They are not a cost in earning those profits. Drawings were disallowed in City of Dublin Steam Packet Co v O’Brien, (1912) 6 TC 101; Pondicherry Railway Co Ltd v Madras Commissioner of Income Tax, (1931) 10 TC 365; Tata Hydro-Electric Agencies Ltd (Bombay) v Bombay and Aden Income Tax Commissioner, (1937) 16 ATC 54; Indian Radio and Cable Communications Co Ltd v IT Commissioners, [1937] 3 All ER 709, (1937) 16 ATC 333.

They were allowed in Moore v Stewarts and Lloyds Ltd, (1905) 6 TC 501.

Expenditure on improvement of premises is not allowed. You can claim repairs (these are a “revenue” expense – see (2)(d)). Capital expenditure is deductible against any future capital gain.

“Repair” and “renew” are not words expressive of a clear contrast. Repair always involves renewal; renewal of a part; of a subordinate part … Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject matter under discussion. (Lord Justice Buckley in Lurcott v Wakely and Wheeler, [1911] 1 KB 905, at pp 923-924).

In Law Shipping Company Ltd v IRC, (1924) 12 TC 621 expenditure on making a ship seaworthy was held to be capital. This may be contrasted with the decision in Odeon Associated Theatres Ltd v Jones, (1973) 48 TC 257. In that case, expenditure on upgrading a cinema were held to be deductible as repairs, as the cinema was in use as a cinema.

Repairs that amount to the replacement of the entire asset are regarded as capital expenditure: O’Grady v Bullcroft Main Collieries Ltd, (1932) 17 TC 93. In that case, it was held that the replacement of an entire chimney was capital expenditure. The decision may be contrasted with the decision in Samuel Jones and Co (Devondale) Ltd v IRC, (1951) 32 TC 513. In that case, expenditure on the replacement of a factory chimney was held to be deductible as the chimney was only part of a greater entirety (the factory). In Brown v Burnley Football and Athletic Co Ltd, (1980) 53 TC 357 it was held that the replacement of a football stand was not deductible as it was the replacement of a separate entity.

The following repairs have been held to be capital:

(a) Railway line: Mann Crossman and Paulin Ltd v Compton, (1947) 28 TC 410.

(b) Dredging: Ounsworth v Vickers Ltd, (1915) 6 TC 671.

(c) Ship: IRC v Granite City Steamship Co Ltd, (1927) 13 TC 1.

(d) Repairs specified as a condition of lease: Jackson v Laskers Home Furnishers Ltd, (1956) 37 TC 69.

(e) Hotel: Bidwell v Gardiner, (1960) 39 TC 31.

(f) Pub: Highland Railway Co v Balderston, (1889) 2 TC 485.

(g) Plant conversion: Lothian Chemical Co Ltd v Rogers, (1926) 11 TC 508.

(h) New roof: William P Lawrie v IRC, (1952) 34 TC 20 Thomas Wilson (Keighley) Ltd v Emmerson, (1960) 39 TC 360.

(i) Shop fittings: Eastmans Ltd v Shaw, (1928) 14 TC 218; Hyam v IRC, (1929) 14 TC 479; cost of fitting out temporary premises pending re-building of original premises destroyed by fire: Fitzgerald v CIR, 1 ITR 91.

(j) Rebuilding: Curtin v M Ltd, 2 ITR 360.

(k) Cattle market: Wynne-Jones v Bedale Auction Ltd, [1977] STC 50.

(l) Breakwater: Avon Beach and Cafe Ltd v Stewart, (1950) 31 TC 487.

(m) Embankment: Phillips v Whieldon Sanitary Potteries Ltd, (1952) 33 TC 213.

(n) New access road: Pitt v Castle Hill Warehousing Co Ltd, [1974] STC 420.

(o) Installation of sanitary facilities as directed by the public health authority: Vale v Martin Mahony and Co Ltd, 2 ITR 32.

(p) Repair which amounts to upgrading of gas system: Auckland Gas Company V CIR, [2000] STC 527.

Interest which is treated as a trading expense is allowed provided it is not treated as a charge: Wilcock v Frigate Investments Ltd, [1982] STC 198.

Interest which qualifies for a trading deduction is allowable, even if it has been capitalised in the accounts (Revenue Precedent CTF203A, 12 October 1995).

In practice, interest on capital is allowed. It was disallowed in Anglo-Continental Guano Works v Bell (1894) 3 TC 239;European Investment Trust Co Ltd v Jackson, (1932) 18 TC 1; Ward v Anglo American Oil Co Ltd, (1934) 19 TC 94. See also Scottish North American Trust Ltd v Farmer, (1911) 5 TC 693. In Wharf Properties Ltd v IRC, [1997] STC 351, (a Hong Kong case), interest paid on loans to acquire and redevelop property was held to be capital (and disallowed).

For an Irish case, see Inspector of Taxes v Ringmahon Company, unreported, SC, 29 May 2001. In that case, the Supreme Court found unanimously that interest paid on a loan taken out to redeem preference shares was laid out wholly and exclusively for the purposes of the company’s trade.

A premium (see section 18, Case III notes) on repayment was disallowed in Arizona Copper Co v Smiles (1891) 3 TC 149 and Bridgwater (E J and W H) v King, (1943) 25 TC 385.

Interest which amounts to an application of profits (i.e., a distribution, see section 130) is not deductible: Walker (AW) and Co v IRC, (1920) 12 TC 297.

Debentures issued in lieu of interest were allowed (as to 75%) in Scottish and Canadian General Investment Co Ltd v Easson, (1922) 8 TC 265.

In Major v Brodie and Anor, [1998] STC 491, it was held that interest on a loan to a partnership was deductible, where the money was lent on by the partnership to a second partnership. Under Scottish law, a partnership is a separate legal entity.

In computing the allocation of charges, interest paid on behalf of subsidiaries is not deductible by the parent:Commercial Union Assurance Co plc v Shaw, [1999] STC 109.

Interest on borrowings to fund drawings is deductible. If the drawings are excessive (i.e., if the capital account is in debit due to an excess of drawings over profits to fund those drawings), the interest relating to the excess is not allowable (Revenue Precedent IT96-2501, 1 February 1996).

Interest on tax paid late is not deductible: section 1089. Also not deductible is interest on a loan to finance the payment of income tax, as it is not wholly and exclusively laid out for the purposes of the trade (Revenue Precedent IT95-2561, 4 October 1995).

The prepayment of interest in order to get a cash flow advantage, where the avoidance of tax is the main purpose, is counteracted by section 817A.

As regards interest paid under the Prompt Payments of Account Act 1997, see Tax Briefing 31, April 1998.

Specific provision for bad debts are allowed: Anderton and Halstead Ltd v Birrell, (1931) 16 TC 200; Calders Ltd v IRC, (1944) 26 TC 213; Dinshaw v Bombay Commissioner of Taxes, (1934) 13 ATC 284; Reid’s Brewery Co Ltd v Male(1891) 3 TC 279.

Bad debts recovered are taxed when recovered: Bristow v Dickinson (William) and Co Ltd, (1946) 27 TC 157, Lock v Jones, (1941) 23 TC 749, Absalom v Talbot, (1944) 26 TC 166. See also Reynolds and Gibson v Crompton, (1952) 33 TC 288.

Non-trading bad debts of an individual are not allowable: English Crown Spelter Co Ltd v Baker, (1908) 5 TC 327;Marsden (Charles) and Sons Ltd v IRC, (1919) 12 TC 217; Baker v Mabie Todd and Co Ltd, (1927) 13 TC 235;Odhams Press Ltd v Cook, (1940) 23 TC 233; Homelands (Handforth) Ltd v Margerison, (1943) 25 TC 414; Marshall Richards Machine Co Ltd v Jewitt, (1956) 36 TC 511; Milnes v J Beam Group Ltd, [1975] STC 487; IRC v Hogart and Burn-Murdoch, (1929) 14 TC 433; Rutherford (W A and F) v IRC, (1939) 23 TC 8; Bury and Walkers v Phillips, (1951) 32 TC 198; Henderson v Meade-King Robinson and Co Ltd, (1938) 22 TC 97.

Bad debt relief for a loan by an architect to a building company was denied in Taylor v Clatworthy SpC 103, [1996] SWTI 1808. Relief for a loan by a parent to a subsidiary was allowed in Sycamore plc and Maple Ltd v Fir SpC 104, [1996] SWTI 2069.

Notional costs are not allowed: IRC v Marx, (1925) 5 ATC 25; Rolfe v Wimpey Waste Management Ltd, [1988] STC 329.

To be deductible a provision must be ascertained: Naval Colliery Co Ltd v IRC, (1928) 12 TC 1017; Ford (H) and Co Ltd v IRC, (1926) 12 TC 997; Spencer (James) and Co v IRC, (1950) 32 TC 111; IRC v Niddrie and Benhar Coal Co Ltd, (1951) 32 TC 244; Albion Rovers Football Club Ltd v IRC, (1952) 33 TC 331; J H Young and Co v IRC, (1925) 12 TC 817; IRC v Hugh T Barrie Ltd, (1928) 12 TC 1223; Clayton v Newcastle-under-Lyme Corporation (1888) 2 TC 416;Collins (Edward) and Sons Ltd v IRC, (1924) 12 TC 773; Whimster and Co v IRC, (1925) 12 TC 813; Merchant (Peter), Ltd v Stedeford, (1948) 30 TC 496; Owen v Southern Railway of Peru Ltd, (1956) 36 TC 602; Titaghur Jute Factory Ltd v IRC, [1978] STC 166; Monthly Salaries Loan Co Ltd v Furlong, (1962) 40 TC 313.

A provision is allowed if deductible from specific receipts: London Cemetery Co v Barnes, (1917) 7 TC 92. Levies payable to a compensation fund were allowed in Smith v Lion Brewery Co Ltd, (1910) 5 TC 568.

There is no rule against charging a provision for a liability that has not materialised at the accounts date, for example a provision for a loss on a court case. However, the amount of the provision must be estimated with reasonable accuracy and it must result in the accounts providing a true and fair view of the profits of the period (Revenue Precedent IT97-2004A, 22 May 1997).

A professional person may have unbilled disbursements on behalf of clients, i.e., disbursements which he/she has not charged and therefore has not collected from the appropriate clients. If the disbursement cannot be billed to the client, or the client refuses to pay it, it can be written off at that stage (Revenue Precedent IT97-2004B, 22 May 1997).

Is capitalised interest on R & D expenditure deductible?

(3) Under IFRS, interest relating to R & D expenditure may be capitalised, i.e, included in the accounts as part of the cost of the asset. Such interest is deductible for tax purposes, provided:

(a) It has not been deducted in a previous accounting period.

(b) No tax relief has been given in respect of the expense for a previous accounting period.

Is a contribution to an EBS deductible?

(1) A contribution to an employee benefit scheme (EBS) is not deductible unless the contributions result in:

(a) a benefit in kind (BIK) on the (qualifying benefits) arising to the employee, or

(b) scheme expenses (qualifying expenses) that are tax deductible to the employer.

An employee benefit contribution includes the holding of, or use of, assets under an EBS, or the increase in total value of such assets.

An accident benefit scheme is an employee benefit scheme which can only provide benefits by reason of your employee’s death or disablement caused by an accident at work.

When is an EBS contribution disallowed?

(2) The restrictions apply to EBS contributions made on or after 3 February 2005.

The restrictions do not apply to certain deductions (see (7)).

When is an EBS contribution allowed?

(3) A contribution to an EBS is tax deductible only if, within the same chargeable period or nine months after it has ended, it results in qualifying benefits or qualifying expenses.

Qualifying benefits and expenses are regarded as provided/paid from the net cumulative contributions to the scheme, i.e., net of previous provisions/payouts.

No other receipts or payments are to be taken into account in determining the net cumulative contribution status of the scheme.

(a) the total cost of the asset to the scheme manager, or if the asset consists of shares or share options provided by the manager, their market value, and

(b) where the employer transferred the asset to the scheme manager, the deduction that the employer would otherwise have obtained (see (2)).

If the employer deduction is greater than the BIK charge on the employees, the deduction is reduced to the employee charge.

Can an EBS contribution be made after the accounting period?

(6) If a contribution is made in the nine months following the end of the accounting period, the nine month period is regarded as ending on the date of the contribution.

Adjustments can be made at the end of the nine month period to take account of benefits, expenses and contributions between that date and the end of the nine month period.

What EBS costs are not restricted?

(7) The restrictions do not apply to:

(a) trading or professional costs,

(b) contributions to an accident benefits scheme,

(c) contributions to approved employee share schemes,

(d) contributions to approved employee pension schemes.

The employer gets a deduction for such expenses even though the employee has not been subjected to a BIK charge in the same period.

Are equalisation account transfers deductible to a reinsurance company?

(1)-(2) A credit reinsurance company may take transfers to and from its equalisation reserve into account when calculating profits for tax purposes.

What is the tax treatment of equalisation transfers?

(3) Transfers from the equalisation reserve are taxed, and transfers to the reserve are deductible.

What happens to the equalisation reserve on cessation?

(4) On ceasing to trade, any balance in the equalisation reserve is deemed to have been transferred out immediately before the cessation.

The transfer is deemed to be for business purposes for the accounting period in which your business ceased and to have been required by Reinsurance Regulations or the Principal Regulations.

When is a transfer to the equalisation reserve not tax-deductible?

(5) A transfer into the equalisation reserve made wholly for tax purposes:

(a) is not tax deductible, and

(b) is disregarded in determining whether there is a requirement to transfer to or from the reserve in accordance with the Reinsurance Regulations or the Principal Regulations.

 When is a transfer made wholly or mainly for tax purposes?

(6) A transfer to the equalisation reserve is treated as made wholly or mainly for tax purposes if tax reduction is:

(a) the sole or main purpose, or

(b) the expected sole or main benefit.

What is an emission allowance?

(1) Directive 2003/87/EC established the EU Emissions Trading Scheme (ETS), to limit greenhouse gases. The ETS places an overall limit on EU greenhouse gas emissions, allocates emission allowances to businesses operating within the scheme, and requires these businesses to surrender sufficient allowances each year to cover their emissions. Businesses can buy and sell emission allowances within the scheme.

An emissions allowance means an emissions allowance, reduction unit or certified emission reduction unit within the meaning of Article 3 of the Directive – allowing the holder to emit one tonne of CO2 or the equivalent amount of another greenhouse gas.

An emissions allowances also includes certified emission reductions (CERs) and emission reduction units (ERUs) under the Kyoto Protocol. A company can exchange such credits for EU allowances in order to meet its obligations under the ETS.

Is the cost of an emissions allowance tax-deductible?

(2) Under existing tax law the purchase of emissions allowance, being the purchase of an asset, represents capital expenditure and accordingly is not tax-deductible (section 81). This section confirms that irrespective of the fact that an emissions allowance is an asset, the cost of such an allowance, if charged to the company’s profit and loss account, is a tax-deductible trading expense.

Is the disposal of an emissions allowance taxable?

(3) The disposal of a purchased emissions allowance give rise to a trading receipt.

Is pre-trading expenditure tax deductible?

(1)-(2) Expenditure incurred in the three-year period prior to commencing to trade is tax deductible.

Expenditure disallowable under section 81 (for example, capital expenditure) or under any other provision in the Acts (for example, entertainment disallowed under section 840) remains disallowable.

Pre-trading expenditure is treated as incurred on the first day of trading.

Is pre-trading expenditure deductible under any other heading?

(4) Pre-trading expenditure cannot be claimed under any other heading for tax purposes. See also Inspector Manual 4.6.8 (examples).

What is an investment company?

(1) An investment company is a comapny whose income derives mainly from the making of investments. A savings bank is an investment company.

An investment company includes:

(a) An industrial and provident society which provided housing at a reduced profit: Cook v Medway Housing Society Ltd, [1997] STC 90.

(b) A group holding company being wound down: Westmoreland Investments Ltd v McNiven, [1998] STC 1131. See also FPH Finance Trust Ltd (in liquidation), v IRC (No 1), (1944), 26 TC 131, Bank Line Ltd v IRC, (1974) 49 TC 307.

The term does not include:

(a) An estate company (in receipt of rental income): Howth Estate Co v Davis, 1 ITR 447; Casey v Monteagle Estate Co, 2 ITR 429. See Obscure Cases Revisited (5), Suzanne Kelly, Irish Tax Review, May 1998.

(b) A property dealing company: Jones v Mason Investments (Luton) Ltd, (1966) 43 TC 570, as such a company is chargeable under Case I, but see Halefield Securities Ltd v Thorpe, (1967) 44 TC 154.

Investments do not have to be turned over: IRC v Tyre Investment Trust Ltd, (1924) 12 TC 646.

See also Inspector Manual 4.8.4 (rental income); 8.2.1 (charges)

What expenses are deductible to an investment company?

(2) An investment company may deduct management expenses when calculating its taxable profits. It may not “double deduct” management expenses that are already deductible against rental income (Case V).

Management expenses may not be reduced by any income not subject to Irish corporation tax (other than distributions from resident companies).

The UK Special Commissioners have held that management expenses include accountants’ and solicitors’ fees in connection with a 50% subsidiary trading company: Holdings Ltd v IRC SpC 117, [1997] SWTI 386.

Management expenses do not include:

(a) Commission to guarantee loan stock: Hoechst Finance Ltd v Gumbrell, [1983] STC 150.

(b) Exchange losses: Bennet v Underground Electric Railways Co of London Ltd, (1923) 8 TC 475.

(c) Costs of a debenture issue: London County Freehold and Leasehold Properties Ltd v Sweet, (1942) 24 TC 412.

(d) Brokerage and stamp duty: Capital and National Trust Ltd v Golder, (1949) 31 TC 265.

(e) Excessive service charges: Fragmap Developments Ltd v Cooper, (1967) 44 TC 366.

(f) Excessive directors’ remuneration: Berry (LG) Investments Ltd v Attwooll, (1964) 41 TC 547.

(g) Discount on premiums: North British and Mercantile Insurance Co v Easson, (1919) 7 TC 463.

(h) Expenses of managing properties held as investments: London and Northern Estates Co Ltd v Harris, (1937) 21 TC 197 and Southern v Aldwych Property Trust Ltd, (1940) 23 TC 707.

(i) Research related to evaluation of potential investments: Hibernian Insurance Co Ltd v MacUimis, SC, 20 January 2000 (Tax Briefing 40, June 2000). This is discussed in Irish Tax Review, July 2000.

Double taxation relief: see Jones v Shell Petroleum Ltd, (1970) 47 TC 194.

Inspector Manual 4.6.11 (case law)

Are bribes tax deductible?

(1) Criminal payments (bribes) are not deductible for tax purposes.

Are bribes tax deductible to an investment company?

(2) Criminal payments are not deductible as management expenses.

Is the cost of establishing a pension scheme tax deductible?

Expenses and fees associated with the establishment of a Revenue approved pension scheme are tax deductible.

What is a premises?

(1) Premises means an industrial building or structure, the construction expenditure for which was incurred before 30 September 1956.

Industrial building allowances were first introduced by Finance (Miscellaneous Provisions) Act 1956 section 16 for capital expenditure incurred on or after 30 September 1956 on the construction of an industrial building or structure.

What deduction can be claimed for an industrial building?

(2) A trader who occupies an industrial premises built before 30 September 1956 can claim a deduction equal to 5/12ths of the rateable valuation of the premises.

What deduction can be claimed for quarries, mines etc?

(3) A person in receipt of income from quarries, mines, etc can claim a deduction equal to 5/12ths of the rateable valuation of a premises which is both owned and occupied for the business.

Must part-qualifying expenditure be apportioned?

(4) If part of a premises (which forms a single unit for valuation purposes) qualifies and part does not, only the proportion of the rateable valuation relating to the qualifying part gets the 5/12ths deduction.

The apportionment is to be made by the inspector or the Appeal Commissioners. A certificate from the Commissioner of Valuation, stating the amount of the rateable valuation attributable to any part of the property, may be given in evidence at the appeal.

How is the release of a bad debt treated?

(1) The release of a written-off bad debt is treated as a business receipt for tax purposes.

To what debts and trades does this section apply?

(1) The section applies to a specified debt which is a debt incurred by an individual for the purchase or development of land which is held as trading stock of a specified trade. A specified trade is a trade of dealing in or developing land.

How is the release of a specified debt treated?

(2) when a debt is released in whole or in part in a tax year the amount released is treated a receipt of the trade for that year.

How is a release treated if the trade has ceased?

(3) If a specified debt is released after the permanent cessation of the trade the amount is taxed as a receipt taxable under Case IV of Schedule D.

When is a debt treated as released?

(4) The release is treated as happening on the earliest of the dates set out in this subsection.

Is relief available for employing a long-term unemployed person?

(1)-(2) “Job assist” relief is available to an employer who employs someone who is long-term employed i.e., on the provision of a qualifying employment to a qualifying individual.

Long-term unemployed means continuously out of work for not less than 312 days, while also in receipt of unemployment benefit or assistance (unemployment payment), or one parent family allowance. The period of long-term unemployment includes periods of participation in FÁS courses. Payments received for such participation count as unemployment payment.

The relief works as follows: in computing profits for a chargeable period, the employer gets a double deduction in respect of:

(a) the wages or salary (emoluments), payable to the employee, and

(b) the employers’ PRSI payable in respect of the employment.

The double deduction applies for the first 36 months of the employment (i.e., the qualifying period). It does not apply:

(a) for any part of the chargeable period falling outside the qualifying period,

(b) if the employer or employee has benefited under an employment scheme that has been funded by the State or a statutory body (with the exception of certain FÁS schemes and Department of Social Welfare activities).

A qualifying employment must take up at least 30 hours per week, and be capable of lasting one year. It does not count if:

(a) it replaces a person who was unfairly dismissed,

(b) the employer has made an employee redundant in the six months preceding the employment,

(c) more than 75% of the pay is in the form of commission.

Revenue job assist, Tax Briefing 31, April 1998.

When will this relief end?

(3) The scheme will not apply to employments commencing after a date to be appointed by the Minister. The Minister has signed regulations ending the scheme from 30 June 2013.

What is trading stock?

(1) Trading stock means stock of property normally sold by a business. The term also includes stock of work in progress that would be sold if finished and stock of raw materials used to manufacture the property sold.

The meaning of trading stock has been considered in Hughes v British Burmah Petroleum Co Ltd, (1932) 17 TC 286;Abbott v Albion Greyhounds (Salford) Ltd, (1945) 26 TC 390; New Zealand Commissioner of Inland Revenue v Europa Oil (NZ) Ltd, (1970) 49 ATC 282; Europa Oil (NZ) Ltd v New Zealand Commissioner of Inland Revenue, [1976] STC 37;Mohanlal Hargovind of Jubbulpore v Central Provinces and Behar Income Tax Commissioner, (1949) 28 ATC 287; IRC v Broomhouse Brick Co Ltd, (1952) 34 TC 1, Stow Bardolph Gravel Co Ltd v Poole, (1954) 35 TC 459; Lions Ltd v Gosford Furnishing Co Ltd and IRC, (1961) 40 TC 256; IRC v Smith’s Executors, (1951) 33 TC 5; Hood Barr v IRC (No 2), (1957) 37 TC 188; Hopwood v C N Spencer Ltd, (1964) 42 TC 169, Coates v Holker Estates Co, (1961) 40 TC 75,Murray v IRC, (1951) 32 TC 238; McLellan, Rawson and Co Ltd v Newall, (1955) 36 TC 117; Golden Horse Shoe (New) Ltd v Thurgood, (1933) 18 TC 280.

The issue of whether secured debts are trading stock was discussed in Torbell Investments Ltd v Williams, [1986] STC 397.

Land or buildings can constitute trading stock (for example, if you are a property developer).

In the case of a profession, “trading stock” includes work in progress.

This section applies to trades in which the value of trading stock would usually be expected to appreciate over time, for example, a trade of dealing in land, investments, or precious stones.

Before it became law, tax could be avoided by ceasing to trade and disposing of trading stock that had significantly appreciated in value. The stock at the date of cessation would have been valued at the lower of cost or market value, which would usually be at cost. The profit on the subsequent disposal of the appreciated stock would not be taxed.

As to accounting rules relating to stock, see notes to section 18.

How is trading stock valued on discontinuance?

(2) If a trade is discontinued and trading stock is sold or transferred for valuable consideration:

(a) To another trader who can deduct the cost of the stock as a business expense, stock at the cessation date must be valued using the rules in (3) and (4). In general, this means that figure for closing stock of the discontinued business is the same as the figure for opening stock in the accounts of the purchaser.

(b) In any other case, trading stock must be valued at open market value on the cessation date.

Stock transferred to a connected person was to be included in the books of transferor and transferee at cost in Bendit (Julius) Ltd v IRC, (1945) 27 TC 44; Craddock v Zero Finance Co Ltd, (1946) 27 TC 267 and Jacgilden (Weston Hall) Ltd v Castle, (1969) 45 TC 685.

Stock transferred to a connected person was to be included in the books of transferor and transferee at market valuein Sharkey v Wernher, (1955) 36 TC 275; Petrotim Securities Ltd v Ayres, (1963) 41 TC 389; Ridge Securities Ltd v IRC, (1963) 44 TC 373; Skinner v Berry Head Lands Ltd, (1970) 46 TC 377 and Watson Bros v Hornby, (1942) 24 TC 506.

For tax planning using this legislation, see Forest Side Properties (Chingford) Ltd v Pearce, (1961) 39 TC 665; Moore v R J Mackenzie and Sons Ltd, (1971) 48 TC 196; Bradshaw v Blunden (No 2), (1960) 39 TC 73; IRC v Barr (No 2), (1955) 36 TC 455 and Kirkcaldy Linoleum Market Ltd v Duncan and IRC, (1965) 44 ATC 66.

“Natural love and affection” does not constitute “valuable consideration” for the purposes of this section (Revenue Precedent IT95-3557, 20 November 1995).

A transfer of stock at a grossly inflated price does not come within (2). For a transfer to come within (2), the purchaser must be entitled to deduct the cost of the stock in computing his/her trading profits. If the transfer value indicates that the transaction is not bona fide, the purchaser would not be entitled to a deduction for such cost (Revenue PrecedentIT95-3552, 6 November 1995).

How is trading stock transferred to another trader valued?

(3) Trading stock transferred to a trader:

(a) Unconnected with the transferor, is to be valued on the basis of the price actually received for it.

(b) Connected with the transferor, is to be valued on the basis of the price that would have been received in an arm’s length transaction between unconnected persons.

How is trading stock transferred to a non-trader valued?

(4) Trading stock transferred to a non-trader must be valued as the greater of its acquisition value (see (5)) and the price actually received for it (see (3)), or either if they are equal. This applies where:

(a) The value of the stock exceeds its acquisition value and also exceeds the price actually received for it.

(b) The transferee includes in his/her self-assessment return an election signed by transferor and transferee that this rule should apply.

What is the acquisition value of trading stock?

(5) The acquisition value of trading stock is the amount which would have been the tax-deductible purchase price if:

(a) the stock was sold immediately before ceasing to trade for an arm’s length price, and

(b) the sale arose in a chargeable period that began immediately before the trade ceased.

How should stock acquired from a discontinued trade be valued?

(6) The value put on trading stock in a ceased trade (in line with the rules in (3) and (4)), is also to be taken as the cost of the stock for the purchaser.

How is WIP valued on discontinuance?

(1) Work in progress (WIP) at discontinuance is valued as follows:

(a) If sold to another professional person who can deduct the cost as a business expense, it is valued on the basis of the amount paid by the purchaser.

(b) In any other case, its value is the open market value.

Can the excess of WIP over cost be treated as as a post-cessation receipt?

(2) A professional person may opt, in writing, within 24 months of cessation, to have the excess of the sale price of WIP over its cost taxed as a post-cessation receipt (section 91). Such excess is not taxed at the date of discontinuance.

(3) In valuing a sole professional’s WIP, death is not regarded as a discontinuance. WIP at death is valued in the same way as at previous year ends.

What is WIP?

(4) Work in progress at cessation includes partially completed professional services which

would be charged to the client on completion of the service.

What are post-cessation receipts?

(1) Post-cessation receipts are business debts:

(a) received after a business has ceased, and

(b) which were not brought into account during the life of the business.

What are not post-cessation receipts?

(2) The following do not count as post-cessation receipts:

(a) income arising outside the Republic of Ireland to a non-resident,

(b) if you have died, a lump sum paid to your personal representatives for the assignment of literary or artistic copyrights,

(c) sale proceeds from the transfer of trading stock or work in progress at the cessation date (these are taxed under sections 89, 90),

(d) “artistic” income that would have been exempt (section 195) had you not ceased.

Are post-cessation receipts taxed?

(3) Post-cessation receipts are taxed under Schedule D Case IV.

Can post-cessation expenses be offset against post-cessation receipts?

(4) You may also have post-cessation expenses, unrelieved losses or unused capital allowances of the ceased business. You may offset these against your post-cessation receipts to arrive at your net tax liability.

What is the earnings basis?

(5) The earnings basis of accounting is the normal “historic cost” or accruals basis of accounting. In accounting for stock and work in progress at cessation, and in dealing with post-cessation receipts, there is an underlying assumption that accounts are prepared on the accruals basis.

Any basis of accounting which does not fully accrue for all earnings and expenses, is referred to as the conventional basis.

If, after ceasing to trade, you recover a written off bad debt, for which you obtained a tax deduction, the recovery doesnot count as a post-cessation receipt to the extent that you got a tax deduction for that write off.

What are the tax consequences when a business changes ownership?

(1) The rules in this section apply where one person (the successor) replaces another (the predecessor) in carrying on a trade or profession. The predecessor is treated as ceasing, and the successor is treated as commencing a new trade or profession.

Is a seller of a business liable on post-sale receipts?

(2) If you are the predecessor, you are taxed on any post-cessation receipts, unless you have transferred the right to such receipts to your successor – in which case he/she is taxed.

If your successor recovers bad debts which you wrote off for tax purposes, he/she is taxed on the receipt.

Can a successor to a business claim for the predecessor’s bad debts?

(3) As successor you may write off, and take a tax deduction for, any irrecoverable bad debts you have taken over. But if your predecessor also wrote off the same debt, you may only off any irrecoverable amount over and above the deduction given to your predecessor.

Who can claim relief on post-cessation receipts?

(1) If you were aged 51 or more on 6 April 1970, and you were accounting on a conventional basis (section 91(5)), you are entitled to relief on certain post-cessation receipts (the net amount).

How is relief on post-cessation receipts calculated?

(2) In relation to post-cessation receipts (section 91), the relevant date means the date the business permanently ceased. In relation to post-change-of-basis receipts (section 94) it means the date of change of basis.

If you were born before 6 April 1919, and were in business on 4 August 1970 and were accounting on the conventional basis, you are entitled to relief on receipts after the relevant date. The chargeable amount is calculated by multiplying the net post-cessation receipts by a fraction (see (4)).

How is the chargeable amount of post-cessation receipts reduced?

(4) The fraction is:

(a) 19/20ths for an individual who was 51 on 6 April 1970,

(b) 18/20ths for an individual who was 52 on 6 April 1970,

(c) 17/20ths for an individual who was 53 on 6 April 1970,

(d) 16/20ths for an individual who was 54 on 6 April 1970,

(e) 15/20ths for an individual who was 55 on 6 April 1970,

(f) 14/20ths for an individual who was 56 on 6 April 1970,

(g) 13/20ths for an individual who was 57 on 6 April 1970,

(h) 12/20ths for an individual who was 58 on 6 April 1970,

(i) 11/20ths for an individual who was 59 on 6 April 1970,

(j) 10/20ths for an individual who was 60 on 6 April 1970,

(k) 9/20ths for an individual who was 61 on 6 April 1970,

(l) 8/20ths for an individual who was 62 on 6 April 1970,

(m) 7/20ths for an individual who was 63 on 6 April 1970,

(n) 6/20ths for an individual who was 64 on 6 April 1970,

(o) 5/20ths for an individual who was 65 or more on 6 April 1970.

What is the conventional basis?

(1) The earnings basis (accruals basis) is standard accounting practice (SSAP 2). It provides for the matching of expenses against income by treating unpaid debts due to the business at the end of the accounting period as assets. Similarly, unpaid debts owed by the business are accrued and treated as liabilities at the end of the accounting period. Under this basis a sale is recognised when the sale is made even though the cash has not been received.

The earnings basis takes into account debtors, creditors, and work in progress. All companies and traders (individuals and partnerships) must prepare accounts on the earnings basis.

A basis other than the strict earnings basis is known as a conventional basis. The meaning of conventional basis was discussed in Walker v O’Connor, UK SpC, [1996] STI 16. The most common conventional basis is the cash basis, under which a sale is only recognised when the cash has been received. Barristers, who cannot in law sue for unpaid fees, use the cash basis. See Wetton Page and Co v Attwooll, (1962) 40 TC 619; Rankine (D and G R) v IRC, (1952) 32 TC 520; McCash and Hunter v IRC, (1955) 36 TC 170.

If you are a professional person, Revenue will accept conventional basis accounts provided you meet the following conditions:

(a) Where you have always prepared accounts on a conventional basis:

(i) your profits computed on the conventional basis do not, taking one year with another, differ materially from what your profits would be on a full earnings basis,

(ii) you issue bills for services rendered or work donebat regular and frequent intervals,

(iii) you include precise details of the basis used as a note to the accounts.

(b) The basis includes debtors and creditors. You need only include work in progress if excluding it would materially affect your annual taxable profits.

(c) If you are commencing business, you must prepare the accounts for the first three years on an earnings basis. After that, you may change to a conventional basis which meets the conditions listed in (a). You must then apply the conventional basis, even with regard to income previously taken into account on the earnings basis.

The onus is on you to prove these conditions have been met: Statement of practice SP IT/2/92, Inspector Manual 4.7.1

Can a person change from the earnings to the conventional basis?

(2) If you change from the earnings basis to the conventional basis it can be expensive, as the same earnings may be doubly taxed.

On the other hand, if you change from the conventional to the earnings basis, some of your receipts may drop out of assessment. To prevent tax avoidance, such pre-change earnings are taxed under Schedule D case IV.

Treatment of debtors creditors and work-in-progress in professional accounts (4.6.3)

Can a person change from the conventional to the earnings basis?

(3) If you change from the conventional to the earnings basis, your work in progress is taxed in the year in which the change occurs.

What is work in progress?

(4) Your work in progress at the change of basis date includes partially completed services which would be chargeable to your client on completion of the service.

When is a person treated as having changed from the conventional to the earnings basis?

(5) You are treated as having changed from the conventional to the earnings basis if your profits for one period are computed on the conventional basis and your profits for the next period are computed on the earnings basis.

If you change from one conventional basis to a different conventional basis, the change is deemed to have occurred at the end of the earlier period.

Can the right to post-cessation receipts be sold?

(1) You are taxed if you sell the right to receive post-cessation receipts. If the sale is not at arm’s length, you are taxed on an arm’s length valuation of the right.

A barrister who on appointment as judge transferred his interest in uncollected fees to a company was held to be personally chargeable on such receipts: O’Coindealbháin v Gannon, 3 ITR 484.

Can post-cessation receipts count as relevant earnings for pension purposes?

(2) If you have post-cessation receipts which, pre-cessation would have been treated as earned income (section 3(3)), you may treat such receipts as pre-cessation earned income.

This allows you to count post-cessation receipts as part of your relevant earnings for retirement annuity relief (section 784).

Can tax on post-cessation receipts be paid in the final year of business?

(3) Yes. You may elect to be taxed on:

(a) post-cessation receipts (section 91) in your final year of business, and

(b) post-change-of-basis receipts (section 94) in the year in which you change basis,

instead of the year in which you obtain those receipts.

You may only make this election if you obtain the receipts not more than 10 years after the year of cessation or change of basis. You must make the election within two years of the end of the tax year in which you obtain the post-cessation receipts.

This allows you to use carried forward losses and capital allowances against the post-cessation receipts in the final year (or the change of basis year) instead of the year of receipt. You may not double-claim such losses and allowances.

Is a sum received for WIP a post-cessation receipt?

(4) You must include in post-cessation receipts any sum you receive for work in progress at the cessation date.

Work in progress at the cessation date is normally dealt with by section 90. This charge only applies if you prepared accounts on the cash basis and did not take such work in progress into account.

Can pre-cessation losses be offset against post-cessation receipts?

(5) Under section 91(4) you may offset unrelieved losses or unused capital allowances of the ceased business against post-cessation receipts. You are not entitled to such an offset if you have already got a deduction under any other rule in the tax code.

Can pre-cessation losses be claimed twice?

(6) You may not double deduct, against post-cessation receipts, unrelieved losses or unused capital allowances. You are given the relief against earlier years before later years. You may not offset an unrelieved loss against profits of a earlier period.

What is rent?

(1) A lease includes any tenancy and any lease-type agreement (but not a mortgage) whereby a landlord (lessor) receives rent from a tenant (lessee) in respect of leased land or buildings (premises) in the Republic of Ireland. Rentincludes any payment in the nature of rent (for example, work done by a tenant on the leased premises).

A premium includes any similar sum, including a sum payable to the immediate or superior lessor or to a person connected with the immediate or superior lessor.

A residential premises is a building, or part of a building, suitable for use as a dwelling together with any adjacent garden or outbuildings. A rented residential premises is one which has a landlord i.e., a person entitled to rent from the premises.

The person chargeable includes trustees for Debt Settlement or Personal Insolvency Arrangements.

(a) The size of the initial premium. If the premium is greater than it should be for a lease of that term, the lease would be regarded as a long lease.

(b) The presence of terms that allow the lease to be extended at the request of the lessee, and the likelihood of such extension.

(c) The entitlement of the lessee (or a person connected with him/her) to a further lease on the same premises. In such circumstances, the first lease is regarded as continuing until the end of the second lease.

In summary, a lease is normally regarded as lasting for the lease term granted. However, where a lease contains break clauses or an unusually large or small premium, or is unlikely to continue beyond a certain date before the end of the lease term, the lease is treated as ending on the realistic end date.

Any relevant facts at the time of the granting of the lease are to be taken into account in deciding whether the lease terms are realistic. The parties to the lease are assumed to be dealing at arm”s length.

A long lease is a lease for a term longer than 50 years. A short lease is a lease for 50 years or less. A lease which lasts longer than 50 years, but the length of which can be varied by either party within that 50 year period, is a short lease. The option to vary the lease in this manner is known as a break clause.

The legislation was originally drafted to prevent short leases being disguised as long leases in order to minimise the tax payable by the recipient of a premium (see section 98).

The legislation was then revised to prevent long leases being disguised as short leases in order to give the payer of a premium an immediate tax deduction for such a payment. If it appears that the lease is not a long lease (in other words that it is unlikely that the lease will continue beyond the expiration of the term of the lease) the lease is regarded as a short lease.

Statement of practice SP CT/1/91 allows rental-related currency gains on hedging instruments to be treated as part of rental income. Corresponding payments are deductible revenue expenses.

How is rental income calculated?

(1) Irish rental income is taxed under Case V as follows:

(a) You calculate the surplus or deficiency on each property by subtracting any allowable deductions from the gross rent receivable.

(b) You aggregate the resulting surpluses and deficiencies for each property to arrive at a net figure for all your properties.

If you have more than one property, you do not total the rents and then deduct the total expenses.

A balancing charge made in charging your Case V income is a “surplus” (Revenue Precedent IT91-3011, 15 March 1991).

What deductions can be claimed against rental income?

(2) You may deduct the following expenses:

(a) any rent payable by you in respect of the property,

(b) rates,

(c) expenses which you are obliged to incur under the letting agreement,

(d) non-capital maintenance, repairs, insurance and management expenses,

(e) interest on money borrowed to acquire, improve or repair the property. Since 7 April 2009, you are only entitled to claim 75% of the interest on a loan to purchase, repair or improve a rented residential property.

Expenditure on construction, conversion or refurbishment of a property in a renewal incentive area (section 372AN) is treated as a deduction authorised by section 97(2).

You are entitled to deduct accountancy fees incurred in preparing a rent account (Tax Briefing 25, February 1997), i.e., a set of accounts relating to a rental property or properties. Accountancy fees include the actual cost of keeping records, maintaining primary documents and preparing financial statements. You may also deduct fees in respect of company audits which are required by law.

You are not allowed a deduction for management expenses equal to a percentage of gross rental income. You are allowed your actual cost in managing the premises. You are allowed a letting agent’s percentage commission for collecting rent, as this is part of the actual cost of managing the premises (Inspector Manual 4.8.3).

A property rental company is allowed deduct directors’ remuneration if it is reasonable having regard to the duties performed. Revenue do not object where the remuneration does not exceed 10% of the gross rents. Where the directors devote a lot of their time to managing your company’s properties and there is not a separate management charge, Revenue will not question remuneration of up to 15% of the gross rents.

In the case of an investment company with rental income to which the 15% limit would apply, this percentage limit applies to the rental income only and the 10% limit applies to the non-rental income.

You are not automatically disallowed amounts in excess of the 10% and 15% limits, although they may be queried by the Inspector (Tax Briefing 31, April 1998).

The percentage limits of 10% or 15%, apply only in determining the level of directors’ remuneration regarded as admissible. Those limits do not include other management expenses and do not apply to other management expenses.

The UK courts have disallowed the following deductions:

(a) Compensation and associated legal expenses paid to a tenant for disturbance: IRC v Wilson’s Executors, (1934) 18 TC 465.

(b) Road charges: Davidson v Deeks, (1956) 37 TC 32.

(c) Rents misappropriated by an agent: Pyne v Stallard-Penoyre, (1964) 42 TC 183.

(d) Collection charges payable under a will (being annual payments): Clapham’s Trustees v Belton, (1956) 37 TC 26.

In determining whether interest is allowable, the inspector will take into account all the circumstances of the case, including whether the transaction was a genuine commercial transaction (Revenue Precedent IT96-2509, 26 September 1996).

(e) Replacement borrowing

Strictly, you are not entitled to a deduction in respect of interest paid on a replacement loan. Revenue recognise that you may wish to take out a replacement loan to avail of a better interest rate or repayment method.

You are allowed deduct interest on a replacement loan if:

(a) the replacement loan does no more than replace the outstanding balance on the existing loan, and

(b) the term of the replacement loan is no longer than the balance of the term of the existing loan.

You may also change the type of loan from annuity to endowment or vice versa.

Therefore, if refinancing, you should take out separate loans, rather than amalgamated loans.

When did the “Bacon” restrictions cease?

(2G) From 1 January 2002, the “Bacon” interest restrictions in (2A) – (2F) are lifted, i.e., since that date, you can get a deduction for interest on a loan to buy, improve or repair a residential premises.

However, from 6 February 2003, you can still be caught by the restrictions, and denied an interest deduction, in respect of a property bought from your spouse/civil partner.

Is rental interest allowable on a dwelling bought from a spouse?

(2H) The reapplication of the interest restriction in (2G) to cases where a premises is bought from your spouse, doesnot apply if:

(a) you and your spouse are separated by court order or by deed of separation, or

(b) you and your spouse have been divorced and your divorce is recognised under Irish law or the equivalent law of a foreign jurisdiction.

Is rental interest allowable on a property that not registered with the PRTB?

(2I)-(2J) No. Since 1 January 2006, you do not get an interest deduction against rental income unless your property is registered with the Private Residential Tenancies Board (PRTB).

From 7 April 2009, relief for interest on money borrowed to purchase, improve or repair a rented residential property is given at 75% of the full interest. Money borrowed to finance the construction of a residential property, and the land on which it is built, is treated as money borrowed to “purchase” a residential property.

If the property in question is part-residential, then the restriction applies only to the residential part.

When is 100% interest relief given for residential property borrowings?

(2K) The restricted amount of 25% will be allowed in respect of certain leases.

 (a) lease means a lease or tenancy registered with the Private Residential Tenancies Board (PRTB);

 A qualifying tenant is a household whose rent is paid by a housing authority or an individual in receipt of rent supplement;

Relevant borrowings are the amount of borrowings that relate to a property or part of a property let to a qualifying tenant;

Relevant interest is the 25% disallowed under subsection 2J;

Specified period is a continuous period of 3 years commencing on or after 1 January 2016 but not extending beyond 31 December 2019.

 (b) A person seeking relief must submit an undertaking to the PRTB that it will let a residential premises to a qualifying tenant for a period of 3 years from 1 January 2016 if the lease commenced before that date or from the date the lease commences if later. The undertaking must be submitted at the same time as the landlord is required to register the tenancy with the PRTB or, if the lease is already in existence at 1 January 2016, by 31 March 2016.

(c) A lease granted before 1 January 2016 which meets the conditions is deemed to be a qualifying lease from that date.

(d) There is provision for allowing a second 3 year period of relief. If a tenant leaves before the end of the 3 year period and there is an interval before a new qualifying tenant is obtained the new lease and the old one are treated as a single qualifying lease provided that the property was not occupied by a non-qualifying tenant, the owner or a person connected with the owner during the interval.

 (e) If a tenant ceases to be a qualifying tenant (e.g. due to an improvement in circumstances) the lease continues to be a qualifying lease as long as that tenant occupies the property.

 (f) To avail of the relief the property must be let under a qualifying lease for one or more 3 year periods and the relevant undertaking referred to in (b) above must be given in respect of each period.

(g) The relief is given on the first day after the end of the 3 year specified period, i.e. the disallowed 25% for each of the 3 years is allowed in aggregate for the tax year in which the specified period ends or the following year if the specified period ends on 31 December.

 (h) A claim for relief must contain a statement that the conditions in (f) have been met and must be made electronically.

(i) If the borrowings are on property that is let under both qualifying and non-qualifying leases the interest must be apportioned.

(j) Documents and records relating to a qualifying lease must be held for 6 years from the end of the specified period to which the claim relates.

Is expenditure outside the letting period deductible?

(3) You do not get a deduction for expenditure incurred outside the letting period (for example, if you advertise to recruit a suitable tenant). Nevertheless, once your property has been let for the first time, you are allowed a deduction for expenditure incurred in an interval between letting periods (for example, minor repairs or redecoration). However, letting fees and solicitor’s costs in negotiating a lease (incurred before letting) were held to be deductible in Stephen Court Ltd v Browne, HC 7 June 1983, TL 120.

Once a lease is in place, you only get a deduction for expenditure that would be deductible under Schedule D Case I rules if the letting were a trade. That does not mean you can, by extension of the rules which allow pre-trading expenditure (section 82), get a deduction for pre-letting expenditure. The only allowable Case V deductions are those in (2). Revenue Precedent IT97-2519, 18 December 1997, Tax Briefing 31, April 1998.

How should common expenditure in a multiple unit property be apportioned?

(4) If, as landlord, you pay charges for a block of apartments, the inspector must apportion the figure between the various apartments according to your best knowledge and judgment. The apportionment must also be made in respect of charges relating to the common areas.

Is rental expenditure deductible against other sources of income?

(5) No – you are not allowed a deduction against rental income if the expense is allowed as a deduction in computing the income of any person for tax purposes.

How is a premium taxed?

(1) Where a premium is received under a short lease, i.e., a lease not longer than 50 years, part of the premium is treated as rent.

The “rent part” is the premium, reduced by 2% for each year other than the first comprised in the term of the lease, i.e.:

P – (P x (N – 1) x 2%)

where P is the premium and N is the number of years in the lease term.

(a) pay a lump sum instead of rent,

(b) surrender the lease on payment of a lump sum.

Such a lump sum is treated as a premium, with the lease duration taken to be the period for which the payment is made.

How is a lump sum for varying the terms of a lease taxed?

(4) A tenant may pay a landlord a lump sum for varying the lease terms.

Such a lump sum is treated as a premium, with the lease duration taken to be the period for which the payment is made.

In Banning v Wright, (1972) 48 TC 421, a payment to a landlord as part of a settlement for breaching the terms of a lease was treated as a payment for the variation of the lease.

How is a premium paid to a connected person taxed?

(5) Where a premium is paid not to a person connected (section 10) with the landlord, that person is taxed under Case IV.

How is a sum, other than rent, for the granting of a lease taxed?

(6) Any sum other than rent paid in connection with the granting of the lease is deemed to be a premium unless it can be shown that it was paid for some other reason.

Does a tenant’s entitlement to extend a lease decide its length?

(7) If a tenant has a right to extend a lease, the term of the first lease is treated as continuing until the end of the term of the second lease.

A premium payable in such circumstances may be regarded as payable under either lease.

Can tax on a premium be paid by instalments?

(8) If a premium is payable by instalments, a recipient who would be faced with undue financial hardship, may request Revenue for permission to spread the tax payable over eight years. The period over which the tax may be spread must end no later than the date on which the last instalment is due.

Payment by instalment does not prevent the lessee getting a full deduction for the premium, even in the case of a sale and leaseback between a lessor and lessee which is its 100% subsidiary: Hammond Lane Metal Co Ltd v O’Culacháin, 4 ITR 197.

Can a non-cash payment be treated as a premium?

(9) A non-cash payment can be regarded as a premium or equivalent amount.

What is a reverse premium?

(1) A reverse premium is a payment or other benefit received by a lessee, in return for entering into a lease agreement.

A person is connected with:

(a) his or her spouse,

(b) his relative,

(c) the spouse of a relative,

(d) a relative of his spouse, or

(e) the spouse of a his spouse’s relative.

A chargeable period means a tax year or company accounting period.

The first relevant chargeable period means:

(a) the chargeable period in which the relevant transaction takes place,

(b) in a case where the relevant transaction is entered into for the purposes of the trade or profession which the recipient of the reverse premium is about to commence, the chargeable period in which he/she commences the trade or profession.

A sale or leaseback arrangement takes place where there is a disposal of a full estate or interest in land to another person who agrees to lease it back.

How is a reverse premium taxed?

(2) A reverse premium is treated as income and not as a capital receipt.

Is a reverse premium treated as rent?

(3) Apart from circumstances mentioned in (4) and (6), a reverse premium is taxed as rental income in the hands of the recipient.

(a) enters into a relevant arrangement, i.e., a relevant transaction together with any associated arrangements made before or after the transaction, and

(b) those arrangements are not made at arm’s length.

How is a reverse premium received by an assurance company taxed?

(6) A reverse premium received by an assurance company whose life business profits are not taxed under Case I b deducting it from management expenses.

What payments are not taxed as a reverse premium?

(7) The following payments or benefits are not subject to the reverse premium rules of this section:

(a) A payment or benefit received where the relevant transaction relates the grant of an estate or interest in the recipient’s sole or main residence.

(b) A payment or benefit made as part of a bona fide sale or leaseback arrangement.

(c) A payment or benefit which is already subject to tax as a trading ar professional income of the recipient.

How is an assignment of a lease at undervalue taxed?

(1) IA profit received for for assigning a lease at undervalue is treated as a “deemed premium” for the grant of the lease and is taxed under Case IV.

How is a sale of property subject to a right to repurchase taxed?

(1) Where a property is sold subject to a condition that it be repurchased by the seller, the excess of the sale price over the (future) resale price is charged under Case IV. If the date of reconveyance is two or more years after the sale, the gain is taxed as a deemed premium.

How is the resale price calculated where the resale date is undetermined?

(2) Where the resale price varies with an as yet unfixed resale date, the resale price is taken as the lowest possible price under the sale terms. If this results in an overcharge, the overpayment may, within the four year tax reclaim period, be repaid on the basis of the facts as they occurred.

How is a sale of a property subject to a right of lease back to the seller taxed?

(3) This rule applies where a property is sold subject to a condition that it be leased back to the seller or a person connected with the seller.

In such a case, the anticipated gain, i.e., the excess of the sale price over the reversion value of the lease (the capitalised value of the rents receivable under the lease together with the discounted future value of the right to re-enter the property at the end of the lease) is taxed under Case IV. A lease back that takes effect within one month of the sale is ignored.

The gain is taxed as if it were a premium (or additional premium). In other words, it is written down at 2% for each year (other than the first year) of the period between the date of completion of the sale and the earliest lease back date.

Should a land dealer include profits from a sale subject to right of repurchase?

(4) A land dealer, in computing his profits under Schedule D Case I (section 640), must exclude receipts taxed under this section.

A “gain” caught for income tax under this section is not also caught for capital gains tax (section 551).

Is a premium paid by a trader tax deductible?

(1) A trader who is a tenant is entitled to deduct a premium paid for his business premises. for tax purposes. The deduction is spread over the relevant period.

In the case of a straightforward premium (section 98), this is the term of the lease.

In the case of a deemed premium on the assignment of a lease at undervalue (section 99), this is the remaining length of the lease at the assignment date.

In the case of a deemed premium on property sold subject to reconveyance (section 100), this is the period from the date of sale until the agreed reconveyance date (or if that date is not fixed, the earliest date at which a reconveyance could take place).

How much of a premium is tax deductible?

(2) A trader gets a deduction for a premium is matched with the amount which the grantor of the premium is taxed under Case V. The deductible part of the premium is spread over the the relevant period.

Is the capital part of a premium deductible?

(3) A trader does not get a deduction for any element of capital expenditure (contained in the premium).

How much of a deemed premium is deductible?

(4) If the reconveyance (section 100) occurs at a price different than anticipated, resulting in tax overpaid, the spreading of the deduction over the relevant period is calculated by reference to the revised price.

Is a premium paid by a landlord tax deductible?

(1) A tenant who sublets is entitled to a deduction for the premium he has paid. The deduction is spread over the relevant period.

In the case of a straightforward premium (section 98), this is the term of the lease.

In the case of a deemed premium on the assignment of a lease at undervalue (section 99), this is the remaining length of the lease at the assignment date.

In the case of a deemed premium on property sold subject to reconveyance (section 100), this is the period from the date of sale until the agreed reconveyance date (or if that date is not fixed, the earliest date at which a reconveyance could take place).

How much of a premium is deductible?

(2) The deduction is matched with the amount on which the grantor of the premium is taxed under Case V. The deduction is spread over the relevant period.

Is a premium tax deductible to an intermediate landlord?

(3) An intermediate landlord who is chargeable on a premium (section 98) or deemed premium (section 99, section 100) may deduct the appropriate fraction of the amount chargeable on the superior landlord (the prior chargeable amount).

Where only part of the premises in the superior lease is sublet, the amounts are apportioned accordingly.

How much of a premium is tax deductible to an intermediate landlord?

(4) Only the unrelieved part of the prior chargeable amount qualifies for relief.

What is the appropriate fraction?

(5) The appropriate fraction of the prior chargeable amount is the fraction arrived at by dividing the length of the superior lease by the length of the sublease.

Is the capital part of a premium tax deductible?

(6) A tenant who sublets does not get a deduction for any element of capital expenditure contained in the premium.

Is a deemed premium tax deductible?

(7) If the reconveyance (section 100) occurs at a price different than anticipated, resulting in tax overpaid, the spreading of the deduction over the relevant period is calculated by reference to the revised price.

Is a seller taxed on post-sale rent?

(1) In general, rent in respect of a let property is payable, for example, quarterly in advance. This can create complications regarding receipts or expenditure when the property changes hands.

There will usually be a need to apportion receipts incurred before and after the completion date for the sale of the property. Pre-sale rents receivable will normally be apportioned to the vendor and post-sale rents receivable will normally be apportioned to the purchaser. Similarly, pre-sale expenditure will normally be apportioned to the vendor and post-sale expenditure will normally be apportioned to the purchaser.

This section clarifies who is taxable in respect of pre-sale (or post-sale) rents receivable. If a property is sold, and the vendor receives an advance payment of rents which are properly payable to the purchaser, the vendor might be technically chargeable to tax on that income. Similarly, where the vendor made a late payment of expenditure on the property, he might technically not be entitled to a deduction for the expenditure.

Normally, it may take several weeks before the sale is completed. During this period a trustee relationship exists between the vendor and the purchaser until the sale is complete. Any rent received in advance (as trustee) is attributable to the purchaser.

Is the sale of a right to receive rent taxed?

(1) This is an anti-avoidance section.

It operates by taxing a relevant transaction, i.e., a scheme, arrangement or understanding under which the right to receive rent from a property is transferred, directly or indirectly, from one person to another person in return for a capital sum. In this regard, rent includes rent from a foreign property. A relevant transaction also includes the sale of the right to rent under a lease for a capital sum.

How is a sale of a right to receive rent taxed?

(2) A capital sum receivable under a relevant transaction (see (1)), is taxed under Case IV. The tax is payable in the tax year in which the entitlement arose, or if earlier, the tax year in which it is received.

This rule does not apply if the capital sum was received by a securitisation company as a result of a bona fide securitisation transaction (section 110).

Is the purchaser of a right to receive rent taxed on the rent?

(3) Except in the case of certain securitisation transactions (section 110), the purchaser of a stream of rental income is charged under Case V on the rental income as it is received.

Is it lawful to apportion profits to accounts periods?

(1) It is lawful to apportion profits to accounts periods.

How should profits be apportioned to accounts periods?

(2) On a time basis, i.e., in proportion to the number of months (or fractions of months) in the accounts period (seesection 66).

Is a redundancy payment tax deductible?

(1)-(2) Non-statutory lump sum redundancy payments are fully deductible and statutory redundancy payments are also deductible, but any rebate of such payments receivable from the Redundancy Fund is taxable.

Lump sum and rebate take their meanings from the Redundancy Payments Act 1967.

A redundancy payment made after trading has ceased is treated as paid on the date of cessation.

Is a redundancy payment tax deductible to an investment company?

(3) An investment company is also entitled to a deduction for redundancy payments as part of its management expenses.

Is a redundancy payment tax deductible to a landlord?

(4) A property landlord (section 97) is also entitled to a deduction for redundancy payments.

Can a redundancy payment be claimed twice?

(5) If there is are two activities, there is no double deduction for the same redundancy payment. In such case, the redundancy payment is apportioned between the various trades or activities.

Is statutory redundancy tax deductible?

(6) Where an employer fails to make a redundancy payment, the payment may be made by the Department of Enterprise and Employment (Redundancy Payments Act 1967 section 32).

Such a payment is not deductible unless it is reimbursed to the Department of Enterprise and Employment.

What is securitisation?

Securitisation is the process whereby a special purposes company (a securitisation company) buys a block of loans (a loan book) from a lending institution. The securitisation company receives the capital and interest repayments on the loans and is responsible for collection of outstanding repayments, informing borrowers of increases/decreases in interest rates and court action where necessary. The securitisation company may appoint the bank (from whom the loan book has been purchased) to carry out these activities and pay appropriate fees for such services.

The securitisation company’s income will consist of the difference between the interest it receives from the loans and the interest it pays on its own borrowings. In the absence of legislation, the company would be taxable on the interest received but would not be entitled to a deduction for the interest payable, as the company would not be regarded as carrying on a trade.

What is a securitisation company?

(1) This section provides special tax treatment for securitisation transactions, i.e., financial transactions carried on by a securitisation company (qualifying company), i.e., one that meets the following conditions:

(a) It is resident in the State.

(b) It acquires qualifying assets, is contracted to manage qualifying assets, or has entered a legally binding contract which is itself a qualifying asset.

(c) It carries on a business of holding, managing, or holding and managing, qualifying assets.

(d) It carries on no other activities apart from activities ancillary to the management of qualifying assets.

(e) The market value of assets under its management is not less than €10m.

(f) It has notified the Revenue authorised officer on the appropriate form, on or before the due date for the company’s self-assessment return for the first accounting period in which it is a qualifying company, that it meets the conditions in (a)-(e).

A company does not qualify if it enters into any non-arm’s length transactions, unless such a transaction is allowed by (4) and is not disallowed by (5).

A qualifying asset is an asset which consists of, or of an interest in, a financial asset:

(a) shares, bonds etc,

(b) futures, options, swaps and similar instruments,

(c) invoices and receivable,

(d) debt instruments,

(e) leases and loan and lease portfolios,

(f) hire purchase contracts,

(g) acceptance credits and documents of title relating to movement of goods,

(h) bills of exchange, commercial paper, promissory notes,

(i) greenhouse gas emissions allowance, and

(j) contracts for insurance and contracts for reinsurance,

(k) carbon offsets,

(l) contracts for insurance and reinsurance.

How are securitisation profits taxed?

(2) In general, securitisation profits are chargeable under Case III, but are computed using Case I rules.

A securitisation company is entitled to deduct irrecoverable bad debts.

Recovered bad debts are treated as income.

Are securitisation losses deductible?

(3) A securitisation company cannot surrender a loss for corporation tax purposes.

It can carry forward unused losses for set-off against against future profits.

The set-off claim is made when the self-assessment return for the subsequent period is being filed.

A loss is computed on the same basis as profits are computed.

Is “section 130” interest deductible to a securitisation company?

(4) This rule applies to interest paid by a securitisation company in respect of a “section 130” loan, i.e., interest on securities that:

(a) depend on the results of the company’s business (in which case all of the interest is a distribution), and

(b) are at more than a reasonable commercial rate (in which case only the excess of the interest over a reasonable commercial return is a distribution).

In general, such interest is not deductible because it is treated as a distribution of profits.

However, such interest will not be treated as a distribution, i.e. it is tax-deductible, except in the circumstances mentioned in (5).

Is interest payable to a non-resident deductible to a securitisation company?

(4A) Subs (4) gives a securitisation company a tax deduction for “section 130” interest. This qualifies subs (4) in the case of a person other than:

(i) an Irish resident person (or non-Irish resident person who is chargeable to tax on the distribution), or

(ii) a pension fund, government body or other person resident in a treaty country who is exempt from tax under the laws of that country.

In such cases, subs (4) will only apply to the extent that the recipient is subject to tax in its country or residence, or subject to Irish withholding tax on the interest.

However, interest is not deductible if the recipient is a specified person, i.e., a connected company or a person who provided the qualifying assets with agreements or loans in place representing 75% or more of the securitisation company’s qualifying assets.

Is interest dependent on the results of the payer deductible?

(4B) Interest dependent on the results of the payer is not deductible.

When is “section 130” interest not deductible to a securitisation company?

(5) The disapplication of the treatment of interest as a distribution (see (4)) is itself disapplied, in other words the interest is treated as a distribution if it is paid, as part of a tax avoidance scheme.

Can a securitisation company base its taxable income on IFRS profits?

(6) A securitisation company can opt for IFRS treatment. This means that its profits continue to be treated on a tax neutral basis unless it opts for IFRS.

Are management expenses deductible to an owner or lessor of mineral rights?

(1) An owner or lessor of mineral rights gets a deduction by repayment of the income tax suffered on rent or royalties received from the letting.

To obtain the repayment the owner must prove tax has been paid on the rent or royalties. He is not entitled to a deduction under this section for any part of the management expenses which is deductible from income under any other section.

The equivalent corporation tax provision is section 77(4).

See also section 104 which taxes income from mineral rights under Case IV.

How does an owner or lessor of mineral rights deduct management expenses?

(2) An owner of mineral rights must make a claim within 24 months after the end of the tax year to which the claim relates.

Can a refusal of a claim by the Inspector be appealed?

(3) If the inspector refuses the claim, there is a right of appeal to the Appeal Commissioners. The appeal must be made within 30 days of the notice of the decision.

What is employment income?

(1) An employee or office-holder is charged to tax under Schedule E (section 19) on the full amount of emoluments(i.e., salaries, fees, wages and perquisites, etc.) earned in the tax year.

Emoluments include:

(a) Bonuses: Denny v Reed, (1933) 18 TC 254; Heasman v Jordan, (1954) 33 TC 518; Radcliffe v Holt, (1927) 11 TC 621; Weston v Hearn, (1943) 25 TC 425.

(b) Commission: Parker v Chapman, (1927) 13 TC 677; Mudd v Collins, (1925) 9 TC 297; Shipway v Skidmore, (1932) 16 TC 748.

(c) Compensation awarded by the Employment Appeals Tribunal to a reinstated employee for lost earnings while absent (Revenue Precedent IT97-1521, 8 May 1997).

(d) Perquisites (“perks”). A perquisite is a benefit that is capable of being converted to money: Tennant v Smith, (1892) 3 TC 158. In that case, a bank manager was not assessable on the value of accommodation provided, as he was required to live on the premises and was not free to let it to anyone else (i.e., to convert the value he had received to money).

The employee is taxed on the market value of the benefit received: Wilkins v Rogerson, (1961) 39 TC 344. In that case, the employee received a £15 voucher to buy clothes. The tailor then invoiced the employer directly. The employee was assessed, not on the cost of the suit to the employer, but on the amount he could obtain by selling the suit second-hand.

If you are given free shares, or shares on preferential terms, you are taxed on the benefit received i.e., the difference between the shares’ market value and the amount you paid for them: Weight v Salmon, (1935) 19 TC 174; Ede v Wilson and Ede v Cornwall, (1945) 26 TC 381; Patrick v Burrows, (1954) 35 TC 138; Tyrer v Smart, [1979] STC 34.

The shares must arise directly from your employment: Bridges v Bearsley, (1957) 37 TC 289. In that case it was held that a transfer of shares by a shareholder was a gift based on the personal regard of the donor and not part of the employee’s emoluments.

The Appeal Commissioners have held that shares given to an employee under an approved profit sharing scheme (section 510) must be treated as emoluments in the SCSB calculation (Schedule 3): 9 AC 2000.

(e) Domestic expenses (gas, rates, electricity) paid by a company on your behalf. See Nicoll v Austin, (1935) 19 TC 51. Such expense payments are now taxed under sections 117–118.

(f) Presents (from your employer): Wright v Boyce, (1958) 38 TC 160.

(g) Proceeds of a sportsman’s “benefit” (testimonial) match: Moorhouse v Dooland, (1954) 36 TC 1; Davis vHarrison, (1927) 11 TC 707; Corbett v Duff, (1941) 23 TC 763, but see Reed v Seymour, (1927) 11 TC 625. See “Emoluments therefrom” below.

(h) Interest paid to an Irish-domiciled employee from deposit in Jersey: O’Leary v McKinlay, [1991] STC 42.

(i) Market value of payment in gold sovereigns: Jenkins v Horn, [1979] STC 446.

(j) Return of premium for articles: Miles v Morrow, (1940) 23 TC 465.

(k) Earnings assigned by a teaching nun to her order: Dolan v K, 1 ITR 656. See also Parkins v Warwick, (1943) 25 TC 419.

(l) Earnings of an undischarged bankrupt: Hibbert v Fysh, (1962) 40 TC 305.

(m) Sick pay (Inspector Manual 5.5.1).

(n) Long service awards. An award consisting of a tangible article of reasonable cost (e.g., a watch) is not taxed provided: the cost to the employer does not exceed €50 for each year of service, the award is in respect of a period of service of not less than 20 years, and no similar award has been made to you within the previous five years. This concession also applies to if you are a director but does not apply to awards made in cash or in the form of vouchers, bonds etc. (Inspector Manual 5.1.4; Tax Briefing 48, March 2002).

(o) An asset transferred to the employee at less than market value. (Inspector Manual 5.1.10).

(p) Luncheon vouchers. (Inspector Manual 5.1.11).

Emoluments do not include:

(a) Prizes unconnected with your employment: Moore v Griffiths, (1972) 48 TC 338, Ball v Johnson, (1971) 47 TC 155.

(b) Gifts: O’Reilly v Casey, (1942) 1 ITR 601. In that case, the taxpayer was held not assessable on a 10% annuity payable from his grandfather’s estate on condition that he manage the estate properties.

(c) Gambling profits: Down v Compston, (1937) 21 TC 60.

(d) A gross pension partly commuted: Cook v Burton, (1957) 37 TC 478.

(e) “Ex gratia” payment made by a company (in liquidation) other than the employing company: McGarry v EF, 2 ITR 261.

(f) Sponsorship payments: Walters v Tickner, [1993] STC 624.

(g) Payments for loss of rights under share option scheme: Wilcock v Eve, [1995] STC 18.

(h) Pensions paid for the benefit of a child of a deceased Garda. These are regarded as the beneficial property of the child and not the widow: O’Coindealbháin v O’Carroll, (1988) 4 ITR 221. But see Ó’Síocháin v Neenan, SC, May 1998, where the court held that contributory children’s pensions payable in conjunction with other entitlements of a Garda widow are taxable.

(i) Pension commutation payment (in the form of a marriage gratuity): O’Síocháin v Morrissey, (1992) 4 ITR 407.

(j) Staff suggestion scheme awards. This is provided the amount of the award is reasonable in relation to the value of the suggestion made, and it is not part of your ordinary duties to make such suggestions. (Tax Briefing 32, June 1998).

(k) Examination awards. (Tax Briefing 39, March 2000).

To be taxable, the benefit must derive from your status as an employee. It must be “in the nature of a reward for services, past, present, or future”: Hochstrasser v Mayes, (1960) 38 TC 673. In that case, ICI, the employer, operated a scheme for employees who were transferred. If the employee sold his house at a loss, the employer would cover the loss. Therefore, not all employees obtained the benefit. It was held that the payment was not caused by the employment. It was caused by the employee selling his house. To be taxable, the employment must be the primary (direct) cause of the payment.

In Laidler v Perry, (1966) 42 TC 351, it was held that a £10 voucher given to each employee at Christmas, in lieu of the turkey the employee had received in previous years, was taxable, as it arose directly from the employment. See alsoBrumby v Milner, [1976] STC 534.

Emoluments “therefrom” include:

(a) Compensation for the cancellation of your employment contract: see Termination Payments below.

(b) Compensation for giving up future salary: Prendergast v Cameron, (1940) 23 TC 122; Leeland v Boarland, (1945) 27 TC 71; Wilson v Nicholson Sons and Daniels Ltd; Wilson v Daniels, (1943) 25 TC 473; Edwards v Roberts, (1935) 19 TC 618.

(c) Compensation for giving up future pension rights: Wales v Tilley, (1943) 25 TC 136.

(d) Compensation for the surrender of contractual rights: Bolam v Muller, (1947) 28 TC 471; Holland v Geoghegan, (1972) 48 TC 482. See also Hamblett v Godfrey, [1987] STC 60, 59 TC 694. In that case, it was held that a £1,000 payment to an employee at the UK Government Communications Headquarters (GCHQ), in return for giving up the right to join a trade union, was taxable. The taxpayer argued that the payment could not derive from the employment, as she had never joined the trade union. It was a once off bounty payment for giving up a civil right. The court held that the payment was taxable as the right would not have existed if the employment did not exist.

(e) Payment in lieu of six months’ notice required under the employment contract: EMI Group Electronics Ltd v Coldicott, [1999] STC 803.

(f) A recruitment award payable to an employee in return for introducing a potential employee (Revenue PrecedentIT97-1537, 3 July 1997).

In Shilton v Wilmhurst, [1991] STC 88, Peter Shilton, who was transferred from Nottingham Forest to Southampton, received £75,000 from his old club (Nottingham Forest) after he had ceased to be employed by the club. The House of Lords held that the payment was taxable as it derived from his new employment with Southampton, although it had been paid by his former club. The payment was an reward for future services, i.e., an inducement payment from Southampton.

In Mairs v Haughey, [1993] STC 569, it was held that an ex-gratia payment made in return for giving up the right to a non-statutory redundancy payment did not derive “from” the employment and was not taxable.

Inducement payments

Although a payment for future services is taxable as emoluments, a payment to you from your prospective employer to give up an existing right (i.e., an inducement payment) is not: Jarrold v Boustead, (1964) 41 TC 701. In that case, a “signing on fee” paid to an amateur rugby player in return for permanently giving up his amateur status was held not to be an emolument. See also Riley v Coglan, (1967) 44 TC 481.

In Pritchard v Arundale, (1971) 47 TC 680, a chartered accountant received 4,000 shares in a company from another shareholder to encourage him to become managing director of the company. In return, the accountant gave up his private practice as an accountant. The receipt of the shares was held not to be an emolument. This was because the shares were not received from his prospective employer, but from another shareholder. In addition, as his prospective remuneration was reasonable there was no suggestion that the shares were a form of disguised remuneration. See also Vaughan Neil v IRC, [1979] STC 644.

In Glantre Engineering Ltd v Goodhand, [1983] STC 1, a chartered accountant received an inducement payment in return for moving from one Schedule E employment to another. The payment was held to be taxable, as he was not permanently giving up anything for which compensation was payable.

If during the course of your employment, you give up a right attaching to your employment status, any payment received for giving up the right is taxable. In McGregor v Randall, [1984] STC 223, an employee received compensation for giving up the right to receive commission. The payment was held to be taxable, as an advance payment for future services. (Contrast Hamblett v Godfrey above).

If the payment compensates you for giving up a right after your employment ceases (for example a lump sum for commuting a right to a pension), the payment is not taxable: Hunter v Dewhurst, (1932) 16 TC 605.

Revenue view on inducement payments (Tax Briefing 32, June 1998)

Following the decision in Hochstrasser v Mayes, (1960) 38 TC 673, arguments have been made, that inducement payments are not payments arising from an office or employment. There may be a perception that payments made to individuals as an inducement to take up employment may be exempt from income tax. It is Revenue’s view that any payment made to an individual as an inducement to take up employment is liable to income tax and PAYE must be deducted at the time of payment, i.e., generally when the offer is made and accepted.

In support of this view Revenue cite the decisions in:

(a) Hamblett v Godfrey, [1987] STC 60, (see above) where Neil L J stated “…the source of the payment was the employment. It was paid because of the employment and because of the changes in the conditions of the employment and for no other reason. It was referable to the employment and to nothing else. Accordingly, in my judgement, the £1,000 was a taxable emolument.”

(b) Glantre Engineering Ltd v Goodhand, [1983] STC 1, (see above) where Warner J stated “the payment … was … an added inducement to him to change his job and enter the full time employment of the company … an emolument from that employment within the meaning of Schedule E.”

(c) Shilton v Wilmshurst, [1991] STC 88, (see above) where Lord Templeman stated “The taxpayer accepted the emolument of £75,000 in return for agreeing to act as or become an employee of Southampton just as he accepted £80,000 from Southampton for the same reason.” Emoluments “from employment” meant “from being or becoming an employee”.

This Revenue view was confirmed in O’Connell v Keleghan, SC 16 May 2001, and the decision in Shilton v Wilmhurst was approved

Termination payments

Emoluments include compensation payments for the early cancellation of an employment contract: Du Cros v Ryall, (1935) 19 TC 444; Henry v Foster, (1932) 16 TC 605; Hofman v Wadman, (1946) 27 TC 192; Henley v Murray, (1950) 31 TC 35; Dale v de Soissons, (1950) 32 TC 126; Williams v Simmonds, [1981] STC 715; Horner v Hasted, [1995] STC 766. Termination payments are now taxed under section 123, but part of the payment may be exempt (section 201).

Emoluments also include:

(a) Payments in lieu of notice: in Delaney v Staples, [1992] 1 All ER 944.

(b) “Redundancy” payments to continuing employees: Allan v IRC, [1994] STC 943, Cullen v IRC, [1994] STC 943.

Payments from third parties (gifts and voluntary payments)

To be taxable, it is not necessary that the emolument be paid by your employer: Calvert v Wainwright, (1947) 27 TC 475. In that case, taxi tips received by a taxi driver from customers were held to be taxable. Although they were not paid by the employer they derived from the employment. The court stated that a special gratuity paid, for example at Christmas to the driver in his personal capacity, might be regarded as being in the nature of a gift.

This decision may be contrasted with the decision in Blakiston v Cooper, (1908) 5 TC 307. In that case, a vicar’s parishioners made a special collection for him at Easter. The vicar was held chargeable on the “Easter offerings” as they were paid to him in his capacity as vicar (not in his personal capacity).

For cases on clergymen’s income, see Re Strong (1878) 1 TC 207; Slaney v Starkey, (1931) 16 TC 45; Turner v Cuxson (1888) 2 TC 422; Herbert (Rev G N) v McQuade, (1902) 4 TC 489; Poynting v Faulkner, (1905) 5 TC 145;Turton v Cooper, (1905) 5 TC 138; Daly v IRC, (1934) 18 TC 641; Reed v Cattermole, (1937) 21 TC 35; IRC v Leckie, (1940) 23 TC 471; Reade v Brearley, (1933) 17 TC 687.

What are emoluments?

(2) In the absence of legislation, it might be possible to argue that emoluments arising before an employment began (or after an employment ceased) are not taxable because they are earned in a tax year in which the employment was not held. In other words, there is no “source” (i.e., the employment itself) of Schedule E income.

Where such emoluments (“joining fees”, etc.) arise before the employment begins, they are taxed in the first tax year in which the employment is held.

Where such emoluments arise after the employment ends (“golden handshakes”), they are taxed in the last tax year in which the employment was held.

This subsection reverses the effect of decision in Bray v Best, [1989] STC 159.

Tax on emoluments is computed on earnings and not on a receipts basis: MacKeown v Roe, 1927 1 ITR 214, [1928] IR 195; see also Bedford v Hannon, 2 ITR 588; Griffin v Standish, [1995] STC 825.

What is an authorised insurer?

(1) A taxpayer is entitled to a tax credit equivalent to the appropriate percentage of an insurance premium paid to anauthorised insurer under a health insurance contract (relevant contract) in the tax year.

If the contract provides for reimbursement of amounts referred to under the contract, the relievable amount means the full amount paid. Otherwise the relievable amount means the part of the payment referable to such reimbursement.

A qualifying insurer is one authorised to carry on life assurance business in Ireland, the EU or the European Economic Area (EEA).

A qualifying long-term care policy is a Revenue-approved policy that provides the reimbursement of an individual’s long-term health care costs.

Is health insurance paid by an employer taxed?

(2) A premium paid to an authorised insurer (section 470) is tax-relieved at source. The insurance company reduces the premium by the standard rate.

If the employer pays the premium, the payment is not treated as tax-relieved at source.

The employer is treated as having paid the gross premium, and the employee is subject to BIK on the gross premium.

What definitions apply in relation to benefit in kind (BIK)?

(1) A director means any person who manages the affairs of a body corporate and includes any person who, while not formally appointed, effectively runs the body.

An employment means an employment, the emoluments of which are assessable under Schedule E.

An employee includes any person who takes part in the management of the affairs of a body corporate and who is not a director and includes the holder of an office.

A person controls a body corporate if either through holding shares or through special voting powers he can ensure that the body’s affairs are conducted in accordance with his wishes.

A body corporate’s business premises includes all of its trade premises as well as any part of a premises owned by the company which is used as living accommodation by a director or employee of the body.

Can BIK be avoided by providing the benefit to a relative?

(2) A BIK provided to a director or employee includes a BIK provided to the employee’s spouse/civil partner, family, dependants, servants or guests.

Who is liable to BIK?

(3) An employee earning €1,905 or more per annum is subject to tax on any BIK (or expenses payment (section 117)) received.

The corollary is that a person with employment income below €1,905 should not be subject to BIK on benefits.

Are expense allowances taxable?

(1) To prevent remuneration being disguised as expenses, all expenses are taxed as emoluments. Expenses incurred wholly, exclusively, and necessarily (section 114) in the performance of the duties can be deducted.

Allowable expenses include:

(a) Reasonable subsistence: Nolder v Walters, (1930) 15 TC 380.

(b) Club subscriptions in lieu of hotels: Elwood v Utitz, (1965) 42 TC 482) but not otherwise: Brown v Bullock, (1961) 40 TC 1.

(c) Use of a room at home: Newlin v Woods, (1966) 42 TC 649. But see Hamerton v Overy, (1954) 35 TC 73 andRoskams v Bennett, (1950) 32 TC 129.

(d) The business proportion of car running expenses: Perrons v Spackman, [1981] STC 731. See section 115.

(e) Expense of membership of the European Parliament: Rt Hon Lord Bruce of Donnington v Aspden, [1981] STC 761.

Expenses not allowable include:

(a) Cost of meals: Sanderson v Durbidge, (1955) 36 TC 239.

(b) Non-working clothes: Woodcock v IRC, [1977] STC 405, Ward v Dunn, [1979] STC 178.

(c) Board and lodgings: Cordy v Gordon, (1925) 9 TC 304, Machon v McLoughlin, (1926) 11 TC 83.

(d) Costs of running a motor cycle: Andrews v Astley, (1924) 8 TC 589.

(e) Car expenses in excess of allowance: Marsden v IRC, (1965) 42 TC 326.

(f) Cost of bringing spouse on a business trip: Maclean v Trembath, (1956) 36 TC 653.

(g) Benefit in kind tax on salesman’s car: Clark v Bye, [1997] STC 311.

(h) Cost of a voluntary overseas trip: Thomson v White, (1966) 43 TC 256; Owen v Burden, (1971) 47 TC 476.

(i) Increase in the cost of living: Bolam v Barlow, (1949) 31 TC 136; Collis v Hore (No 1), (1949) 31 TC 173.

(i) Mess expenses: Lomax v Newton, (1953) 34 TC 558; Griffiths v Mockler, (1953) 35 TC 135). See also Kelly v H, 2 ITR 460.

(k) Use of home telephone: Lucas v Cattell, (1972) 48 TC 353.

(l) Housekeeper while wife working: Bowers v Harding (1891) 3 TC 22.

(m) Childminder: Halstead v Condon, (1970) 46 TC 289.

(n) Evening classes: Blackwell v Mills, (1945) 26 TC 468.

(o) Lecture fees: Humbles v Brooks, (1962) 40 TC 500.

(p) Examination fees: Lupton v Potts, (1969) 45 TC 643.

(q) Legal costs: Eagles v Levy, (1934) 19 TC 23.

(r) Agency fees: Shortt v McIlgorm, (1945) 26 TC 262.

(s) Unevidenced travel expenses: Smith v Fox, [1989] STC 378; MacDaibhéid v Carroll, (1978) 3 ITR 1.

(t) Interest on money borrowed to buy an office: Baird v Williams, [1999] STC 635.

(u) Expenses payments by local government engineers which were not incurred during the course of the employments: O’Broin v MacGiolla Meidhre and Pigott, 2 ITR 366.

See also Rendell v Went, (1964) 41 TC 641.

Employee removal/relocation expenses (Statement of Practice SP IT/1/91; 5.2.2).

Are expense accounts taxable?

(2) A sum put at the disposal of an employee and “paid away” by the employee is treated as a perquisite.

What is a benefit in kind (BIK)?

(1) Emoluments (section 112) includes cash-convertible benefits, fees, commissions, perquisites (“perks”), expenses payments, for example, vouchers, holidays, payment of life insurance, medical insurance, bonus bonds, prizes etc.

A benefit in kind (BIK) (sections 116–122A) is a non-cash benefit, i.e., a benefit paid “in kind” (other than in cash) for example, a car, van or accommodation.

Such benefits are subject to tax if not:

(a) already taxed as a perquisite, and

(b) repaid by the employee.

Benefits taxed include:

(a) The value of rent free accommodation: Stones v Hall, [1989] STC 138. Cases on earlier legislation regarding employees’ accommodation: Bent v Roberts (1877) 1 TC 199; Tennant v Smith (1892) 3 TC 158; Gray v Holmes, (1949) 30 TC 647; Nicoll v Austin, (1935) 19 TC 531; Langley and others v Appleby, [1976] STC 368; McKie v Warner, (1961) 40 TC 65. In Templeton v Jacobs, [1996] STC 991, it was held that a benefit (loft conversion) paid employment started but provided afterwards was taxable. See now section 119(4).

Repairs to the accommodation are usually included: Doyle v Davison, (1961) 40 TC 140. But see IRC v Luke, (1963) 40 TC 630 and Butter v Bennett, (1962) 40 TC 402.

(b) Rent paid by your employer for your accommodation: Connolly v McNamara, 2 ITR 452.

(c) Garage allowance paid for storing company property: Beecham Group Ltd v Fair, [1984] STC 15.

(d) School fees paid by your employer in respect of your child: Glynn v Hong Kong CIR, [1990] STC 227.

(e) A loan to a non-resident employee benefit trust: O’Leary v McKinley, [1991] STC 42.

(f) Provident contributions: Bell v Gribble, (1903) 4 TC 522, Smyth v Stretton, (1904) 5 TC 36.

(g) Insurance premiums: Richardson v Lyon, (1943) 25 TC 497.

(h) Encashable car benefit: Heaton v Bell, (1969) 46 TC 211.

(i) Clothing allowances: Fergusson v Noble, (1919) 7 TC 176.

(j) Meals allowances: Sanderson v Dunbridge, (1955) 36 TC 239.

(k) Tax paid by your employer on your behalf: North British Railway Co v Scott, (1922) 8 TC 332; Hartland v Diggines, (1926) 10 TC 247.

(l) Lodging allowance: Nagley v Spilsbury, Evans v Richardson, (1957) 37 TC 178.

(m) Overseas allowances: Robinson v Corry, (1933) 18 TC 411; Barson v Airey, (1925) 10 TC 609.

(n) Temporary pensions: Esslemont v Estill, [1980] STC 387.

(o) Attendance allowances: Dingley v McNulty, (1937) 21 TC 152.

(p) Loan waivers: Clayton v Gothorp, (1971) 47 TC 168.

(q) Compensation for withdrawal of a company car: Bird v Martland; Bird v Allen, [1982] STC 603.

(r) Preferential university fees for children of full-time university staff, free medical services, recreational services, uniforms, but not free transport provided where you are are required to work late and do not have your own transport (Inspector Manual 5.3.8).

In Pepper v Hart, [1992] STC 898, the UK House of Lords held that a BIK consisting of reduced fees for children of schoolteachers was taxable on the basis of marginal cost (not full cost). The judges accepted that statements made in parliament, recorded in Hansard, could be helpful in interpreting the intent of the legislation. In Crilly v T & J Farrington, HC, 21 December 1999, a non tax case, the judge accepted that the court could consider parliamentary materials as an aid to statutory interpretation.

Is accommodation taxed as BIK?

(2) Accommodation provided in an employer’s premises is not taxed if such accommodation is provided and used only in the performance of the employee’s duties.

Is compulsory accommodation taxed as BIK?

(3) BIK does not apply where the employee must live on the premises to perform his duties. This exemption only applies:

(a) In the case of accommodation provided under what was the prevailing practice before 30 July 1948. This means that a bank manager provided with accommodation on the bank’s premises is not liable to BIK.

(b) Where it is necessary for the type of trade in question that the employee should reside on the premises.

In Butter v Bennett, (1962) 40 TC 402, it was held that this exemption did not apply to payment by a company of coal, electricity and garden maintenance expenses.

In Vertigan v Brady, [1988] STC 91, it was held in relation to a nursery foreman that it was neither necessary for performance of his duties nor the custom of the trade to provide him with living accommodation.

Are staff meals taxed as BIK?

(4) Staff canteen meals that are provided for all staff are not subject to BIK.

What are personal security expenses?

(1)-(2) An employee may be entitled to tax relief if there is a “credible and serious threat” to his personal physical safety arising from his employment.

Are personal security expenses tax deductible?

(3) Personal security expenses are tax deductible.

(5) Incidental private use of the personal security asset is ignored.

Is partial use of personal security assets taxed?

(6) Where assets are partly used to improve your personal security, the expenditure must be apportioned.

When are personal security expenses deductible?

(7) The relief only applies if it results in an improvement in to the employee’s personal physical security.

When is relief for personal security expenses taxed?

(8) Personal security relief is not lost if:

(a) the asset becomes fixed to land,

(b) the property in the asset passes to the employee,

(c) the asset or service also improves the personal physical security of the employee’s family or household.

(a) a travel pass,

(b) an approved profit-sharing scheme, or

(c) a bike.

Is the use of an employer-owned asset taxed as BIK?

(1) In general, the value of a BIK is the cost to the employer of providing the benefit, less any contribution by the employee (section 118(1)).

If the asset remains the property of the employer, the capital cost is ignored.

How is the transfer of an asset to an employee taxed?

(2) Where an asset is transferred to an employee, BIK is based on the tax written down value of the asset.

How is the use of an employer-owned asset taxed as BIK?

(3) An employee who has the use of an asset is taxed on the annual value of such use, less any contributions paid to the employer.

How is the use of accommodation provided by an employer taxed as BIK?

(4) Where an employer provides an employee with accommodation, rent-free or at a reduced rent, BIK is calculated as:

the open market rent (generally taken as 8% of the property’s current market value or a more accurate figure if available),

plus the annual value of any furnishings/fittings in the house (generally taken as 5% of their cost when new),

plus any incidental expenses (repair, maintenance, insurance etc) paid by the employer, less any payment the employee makes towards the rent and/or expenses.

No BIK arises if it is a condition of the employment that the employee live on the premises because of the nature of the job (e.g., a lighthouse keeper).

Do the BIK rules apply to non-corporate bodies?

(1) The BIK rules also apply to employees of non-corporate bodies and public bodies.

Is an employee of a partnership controlled by a company double-charged BIK?

(2) An employee of:

(a) a partnership controlled by a company is regarded as employed by that company, and

(b) a company controlled by a partnership is regarded as employed by that partnership.

Control means the right to more than 50% of the partnership assets or income.

A person employed by both the partnership and the company is regarded as employed by the company for BIK purposes.

Are benefits provided to an employee of a sole trader subject to BIK?

(3) Benefits provided to an employee of a sole trader are also subject to BIK.

Are benefits provided to an office holder or employee of a public body subject to BIK?

(4) Benefits provided to an office holder or employee of a public body are also subject to BIK

What are “public bodies”?

(6) Public bodies are the Civil Service. the Gardaí and the Permanent Defence Force.

Is the use of a company car taxed as BIK?

(1)-(2) A car is a private (i.e., non-commercial) passenger motor vehicle. it does not include a motor-cycle or a van (section 121A). A motor-cycle means a vehicle with less than four wheels which weighs less than 410kg.

An employee who has the use of a company car is taxed on the cash equivalent (see (3)) of the private use.

Business use means necessary business travel undertaken in the performance of the employment duties. A car is regarded as available for private use unless the employee is prohibited from using, and does not use, the car for private use.

“Made available” means made available by reason of the employment.

Available includes being available to the employee’s family or household, i.e., spouse, children, children in law, parents, servants and guests. Therefore a company car provided to the employee’s wife is taxed on the employee.

The other BIK provisions (section 118) do not apply to company cars.

Business mileage means the total such mileage recorded on the car during that year.

A relevant log book is a daily record of distances travelled, nature and location of business conducted, and time spent away from the office, which is certified by the employer.

This BIK charge on company cars is not unconstitutional: Browne and others v Attorney General and others, 4 ITR 323.

A car is not regarded as available if the employee is working outside the Republic of Ireland:

(a) For at least 30 days a year (excluding foreign holidays). A day for this purpose must include an overnight stay.

(b) The car remains in Ireland.

(c) The car is not available for use by the employee’s family or household while he is abroad.

(Tax Briefing 28).

How is the use of a company car valued for BIK?

(3) The cash equivalent of the benefit of the car is 30% of the car’s original market value (including customs duty, excise duty and VAT), i.e., 30% of the list price of the car when new.

This is scaled back proportionately where the car is only available for part of the year.

Business mileage		Percentage of original market value
lower limit	upper limit
(1)	(2)	(3)
kilometres	kilometres	per cent
24,000	32,000	24
32,000	40,000	18
40,000	48,000	12
48,000	–	6

This means that the 30% used to calculate the cash equivalent of the benefit of the car can be reduced to as low as 6%.

Business mileage		Vehicle Categories
lower limit	upper limit	A, B and C	D and E	F and G
(1)	(2)	(3)	(4)	(5)
kilometres	kilometres	per cent	per cent	per cent
–	24,000	30	35	40
24,000	32,000	24	28	32
32,000	40,000	18	21	24
40,000	48,000	12	14	16
48,000	–	6	7	8

Vehicle Category	CO2 Emissions (CO2g/km)
(1)	(2)
A	0g/km up to and including 120g/km
B	More than 120g/km up to and including 140g/km
C	More than 140g/km up to and including 155g/km
D	More than 155g/km up to and including 170g/km
E	More than 170g/km up to and including 190g/km
F	More than 190g/km up to and including 225g/km
G	More than 225g/km

(a) drives over 8,000 business km per year,

(b) works more than 20 hours per week,

(c) spends 70% or more of his time away from the employer’s premises.

The employee must keep a relevant logbook showing distances travelled, nature of business, and amount of time spent away from the office. This logbook must be certified by the employer and must be shown to an inspector within 30 days of a request to do so. It must be kept for inspection for six years after the end of the year to which it relates, unless agreed otherwise with the inspector.

A Revenue decision as to working hours or logbook details may be appealed within two months of the date of notice. The Appeal Commissioners must determine the appeal as if it were an appeal against an income tax assessment. There is a further right of appeal to the Circuit Court, and on a point of law to the High Court.

Must an employee inform Revenue that he has a company car?

(6) An employee must notify the inspector within 30 days of the end of the tax year if he has the use of a company car. He must provide the inspector with details of the make and list price of the car, and business and private mileage for the year.

In the absence of these details, the inspector must estimate the BIK with 5,000 miles taken as the assumed private mileage.

Is use of a “car pool” car taxed as BIK?

(7) The use of a “car pool” car (i.e., a car that is available to, and used by, more than one employee), is not caught for BIK if private use is incidental and the car is not kept overnight at or near the employee’s home, unless the employer premises happens to be near the employee’s home.

One or more employees can claim the car pool relief.

A Revenue decision as to car pool arrangements may be appealed to the Appeal Commissioners within two months of the date of notice.

The decision of the Appeal Commissioners is binding on all the employees, even if they have not taken part in the appeal proceedings. Once such a decision has been made, no further appeals may be entertained by the inspector in respect of the same car for the same year.

What is a van?

(1) A van is a road vehicle with an engine which:

(a) has been designed to carry things,

(b) has a roofed area to the rear of the driver,

(c) has no side windows or seating in the roofed area.

(2) The use of a van (see (1)) is subject to BIK on the difference between:

(a) the cash equivalent of the benefit , i.e., 5% of its original market value, and

(b) the amount reimbursed to the employer.

(a) the van is used to perform the employment duties,

(b) the van must be kept near the employee’s home when not being used for work,

(c) private use of the van other than for travel between home and workplace is prohibited, and there is no such use, and

(d) at least 80% of the employee’s time is spent away from his “base” place of work.

(4) The following car BIK rules also apply to vans:

(a) Time apportionment where a car has not been held for the full tax year (section 121(3)(b)).

(b) The obligation to report the provision of the vehicle (section 121(6)).

(c) Exemption for “pool” vehicles (section 121(7)).

4% in the case of a home loan;

13.5% for other loans.

Is an award of shares at undervalue taxed as BIK?

(1)-(2) An employee who is allotted shares at an undervalue is regarded as having received an interest free (notional loan). That loan is treated as a preferential loan (section 122).

When are shares received at undervalue?

(3) Shares are received at undervalue if:

(a) they are obtained without payment, or

(b) they are acquired at less than the market value,

irrespective of whether there is any future obligation to make any further payment for the shares.

How is a notional loan valued?

(4) The amount initially outstanding for the notional loan is the amount of the undervalue on acquiring the shares. The loan is outstanding until terminated (see (5)). Payments towards the shares reduce the loan.

When does a notional loan terminate?

(5) The notional loan terminates when:

(a) it has been cleared by payments toward the shares,

(b) the employee is released from an obligation to pay for the shares,

(c) the employee disposes of the shares, or

(d) the employee dies.

(6) If the loan terminates in the manner described in (5)(b) or (c), the outstanding loan balance is treated as written off, and the employee is taxed on the amount written off (section 122(3)).

How is the sale of shares acquired at undervalue taxed?

(7) Where an employee disposes of shares:

(a) and does not retain any interest in the shares, and

(b) for a consideration in excess of the shares’ market value,

the excess is taxed as emoluments (section 113) for the tax year in which disposal occurs.

Is the sale of shares of a former employer taxed?

(8) The tax charge under (6) applies even where the employment that gave rise to the benefit has ceased.

Is a post-death sale of shares taxed?

(9) A post-death disposal of shares does not give rise to a tax charge.

Is an interest in shares taxed as BIK?

(10) These rules also apply where an employee disposes of an interest in shares which does not amount to full beneficial ownership, for example a future interest or a life interest, but not a share option. In such cases:

(a) the employee is treated as acquiring the shares at the time the interest is acquired,

(b) the market value of the interest in the shares is proportionate to the market value of the shares in which the interest subsists,

(c) interests in shares are to be compared with interests in shares of the same class,

(d) the market value of an interest in fully paid-up shares of a certain class means a corresponding proportionate interest in the market value of such shares.

(11) Payment includes consideration in money or money’s worth.

Is a termination payment taxed?

(1) Generally, a termination payment receivable by an employee from his employer is taxed. Subject to certain conditions, it may be exempt (section 201) or if not exempt it may qualify for further relief (Schedule 3).

What termination payments are taxed?

(2) The following payments are taxable:

(a) compensation for loss of office,

(b) salary or wages in lieu of notice,

(c) damages for breach of employment contract,

(d) a payment to release an employee from the employment contract (except lump sums under an exempt approved scheme (section 778) or a statutory scheme (section 777) – see section 201(2)),

(e) a lump sum in commutation of pension rights,

(f) a retirement gratuity at the employer’s discretion,

(g) a non-statutory redundancy payment.

This section catches:

(a) the gross payment before expenses (Warnett v Jones, [1979] STC 131),

(b) an inducement payment from your former employer to join a new employer (Shilton v Wilmshurst, [1991] STC 88),

(c) non-residents (Nichols v Gibson, [1994] STC 1029),

(d) “damages” paid in consideration of, connection with the loss of employment, and not otherwise taxed (Revenue Precedent IT97-1533, 13 June 1997),

(e) compensation awarded by the Labour Court arising from an unfair dismissals case (Revenue Precedent IT97-1507, 18 April 1997),

(f) a termination payment that is repayable to your employer from the proceeds of a life policy on your death (Horner v Hasted, [1995] STC 766),

(g) an award from the Employment Appeals Tribunal as compensation for the loss of employment. See Tax Briefing 40.

It does not catch:

(a) a payment in lieu of notice if such a payment is provided for in your employee contract. In such a case, the payment in lieu of notice is taxed as part of your normal emoluments. See EMI Group Electronics Ltd v Coldicott, [1999] STC 803.

(b) A payment in compensation for making you “redundant” if you are immediately re-engaged by the same employer: (Tax Briefing 22). Such a payment is taxed as part of normal salary.

(c) an award from the Employment Appeals Tribunal as compensation for loss of earnings – see Tax Briefing 40,

(d) a retirement gift: Mulvey v Coffey, 1 ITR 618.

What is a permanent health benefit scheme?

(1) A permanent health insurance policy, sickness or similar insurance, qualifies as a permanent health benefit scheme if it is drawn up in the standard form (or a variation thereof) approved by Revenue.

Must Revenue approve a permanent health scheme?

(2) Contributions to a permanent health scheme are tax deductible, provided they do not exceed 10% of the contributor’s total income (section 463).

Is a benefit under a permanent health scheme taxed?

(3) The income benefit received under a permanent health scheme is subject to PAYE.

Can Revenue delegate their powers in relation to permanent health benefit schemes?

(4) Revenue may nominate one of their officers to discharge their functions under this section.

Are social welfare payments taxable?

(1)-(2) The following social welfare payments are subject to PAYE:

(a) the widow’s (contributory) pension,

(b) the orphan’s (contributory) allowance,

(c) retirement pension, and

(d) the old age (contributory) pension.

What other benefits are taxable?

(2A)From 1 July 2013 maternity benefit, adoptive benefit and health and safety benefit are subject to PAYE.

Who pays tax on increases in pensions paid to adult dependants?

(2B) The pensioner who has the adult dependant is liable to tax on such increases.

Are unemployment payments taxable?

(3) The following social welfare payments are subject to PAYE:

(a) Jobseeker benefit. The recipient is entitled to the PAYE credit. Revenue leaflet IT24, Taxation of unemployment benefit. Jobseeker allowance is exempt.

(b) Disability benefit. The recipient is entitled to the PAYE credit. Disability allowance is exempt (Inspector Manual7.1.5).

(c) Injury benefit.

(d) Pay related benefit.

Is part of jobseeker benefit exempt?

(4) The first €13 in any income tax week is exempt. The €13 is deducted from the benefit net of child dependant allowance. In other words, child dependant allowance payable with jobseeker benefit is ignored for income tax purposes.

The first income tax week of the calendar tax year is 1 January to 7 January inclusive. The second income tax week of the income tax year is 8 January to 15 January, etc.

Are disability and injury benefits taxable?

(5) Since the tax year 1998-99, the first 36 days of disability and/or injury benefit is exempt from tax.

From what date are social welfare benefits taxable?

(6) Unemployment benefit, disability benefit, injury benefit and pay related benefit (or any one of them) are chargeable to tax from a date to be fixed by order of the Minister for Finance.

Can Revenue make regulations for taxation of social welfare benefits?

(7) The Revenue Commissioners may make regulations for the application of PAYE to social welfare payments.

Such regulations must be laid before Dáil Éireann, and if not annulled within 21 days are deemed to have been passed.

What is a restrictive covenant?

(1) A restrictive covenant arises when an employee undertakes not to carry on certain activities, for example:

(a) not to compete with an ex-employer within five years of leaving the job,

(b) not to work for a competitor after leaving the job.

For many years such payments were exempt: Beak v Robson, (1942) 25 TC 33, Higgs v Olivier, (1952) 33 TC 136.

This section ensures that such a payment is taxed under Schedule E (Schedule D Case III in the case of a foreign employment).

Is income from a restrictive covenant taxed?

(2) Income from a restrictive covenant is taxed, even where received before the employment begins, or after the employment ceases.

A post-death payment is taxed as having been paid immediately before death; otherwise, it is taxed for the tax year in which it is paid.

Is a non-cash payment received under a restrictive covenant taxed?

(3) A non-monetary payment under a restrictive covenant (the giving of valuable consideration) is taxed on the basis of its value when given, not when the employer undertakes to give it.

Is a restrictive covenant payment tax deductible?

(4) A business owner may deduct the restrictive covenant payment as a trading expense in his tax computation for the tax year basis period (or corporation tax accounting period) in which he made the payment.

Is a restrictive covenant payment tax deductible to an investment company?

(5) An investment company (section 83) or life assurance company (section 707) may deduct a restrictive covenant payment as part of its management expenses.

Are all restrictive covenant payments taxable?

(6) This section applies to any payment or consideration for any undertaking.

Is income of Irish airline flight crew taxed?

(1) Income of flight crew of Irish-based airlines subject to PAYE – even if the employee is not resident in the Republic of Ireland.

What is international traffic?

(2) “International traffic” does not include aircraft operated solely on internal flights in another country.

Are share options taxed as BIK?

(1)-(2) An employee who receives a share option is taxed under Schedule E in the tax year in which the option is exercised. This rules applies even if the employee was not resident in Ireland at the time the option was granted.

Share options are “emoluments” for the purposes of calculating:

(a) the Standard Capital Superannuation Benefit (SCSB); see section 201, Schedule 3 (Revenue Precedent IT96-1593, 10 March 1997), and

(b) the foreign earnings deduction (section 823) (Revenue Precedent GM, 14 April 1997).